Key Takeaways
Inflation cooled down in January, according to the Federal Reserve's preferred measure of inflation, contradicting signals from an earlier official report this month.
The cost of living rose 2.5% in January over the last 12 months as measured by Personal Consumption Expenditures, the Bureau of Economic Analysis said Friday. That was less than the 2.6% annual increase in December, marking the first time in four months the inflation measure decreased. The report marked a rare instance where the government's two major measures of inflation showed opposite trends for the same month: the
Consumer Price Index rose unexpectedly fast
in January, the Bureau of Labor Statistics said earlier this month.
The decelerating PCE inflation provided some evidence that inflation is on a trajectory down to the Fed's goal of a 2% annual rate, where it tended to hover in pre-pandemic years. Inflation had been on a downward path after its post-pandemic surge, but progress had been stalled for months.
The benign inflation reading on Friday, which matched economists' expectations, could ease concerns among consumers and investors about the possibility of inflation accelerating, which would keep the Fed from lowering interest rates.
"Core" PCE inflation, which excludes volatile prices for food and energy, fell to a 2.6% increase over the year, down from an upwardly-revised 2.9% in December, hitting its lowest since June. Economists and policymakers prefer core measures when assessing inflation because food and gas prices can fluctuate for reasons that have little to do with longer-term inflation trends.
The government's two main inflation measures, the
Consumer Price Index
and
Personal Consumption Expenditures
, are calculated differently and take different prices into account. For example, the CPI is much more affected by changes in housing costs. The two measures usually move roughly in tandem, but sometimes diverge. The Federal Reserve prefers the PCE measure, and uses core PCE inflation as its benchmark for assessing whether inflation is running at its target of 2%. Some economists had speculated the surprising surge of CPI inflation in January was
partly due to a quirk of the data
.
Trump's Tariff Plans are a Wild Card for Inflation
Many forecasters expect inflation to
gradually decrease over the rest of the year
, providing some relief for household budgets that have been squeezed by years of larger-than-usual price increases for everyday expenses. However, President Donald Trump's proposed tariffs against foreign trading partners, set to kick in next week,
are a major wildcard
, and could push prices up on a wide range of items.
The downtick in year-over-year inflation in January may not be enough, on its own, to revive hopes that the Federal Reserve will cut interest rates anytime soon. The Fed kept its benchmark interest rate at a higher-than-usual level in January, keeping upward pressure on borrowing costs for all kinds of loans in order to discourage borrowing, slow the economy, and drag down inflation. Member's of the Federal Open Market Committee, the central bank's policy-setting body, have indicated they're in
no hurry to cut rates
until they see more evidence that high inflation is truly fading, and can assess how much Trump's trade wars will change the outlook.
"The Federal Open Market Committee is unlikely to cut the rate again until core PCE inflation has moved noticeably lower," Gus Faucher, chief economist at PNC, said in a commentary. "PNC expects the next fed funds rate cut to come in May. But this rate cut could be pushed out later into 2025, or even into 2026, if tariffs and stronger wage growth lead to higher near-term inflation."
Update, Feb. 28, 2025:
This article has been updated after publication to include commentary from an economist and discussion of the report's possible impact on the Federal Reserve's monetary policy.
Correction, Feb. 28, 2025:
This article has been updated after publication to correct the December core PCE inflation rate to include the BEA's revision of December's data.
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