Dive Brief:
- Inflation slowed last month to a lower-than-forecast 2.4% from 2.7% in December, the Bureau of Labor Statistics said Friday, as surveys show that high prices and affordability persist in 2026 as a major source of worry for consumers.
- So-called core inflation, which excludes volatile food and energy prices, cooled to 2.5% from 2.6% in December, the BLS said. Energy prices fell 1.5% in January while shelter prices rose 0.2%, fueling inflation more than any other category, according to BLS.
- “Bottom line: This is reassuring on inflation, is consistent with my view that underlying inflation is about 2.5% with some downward pressure,” Harvard University Economics Professor Jason Furman said on X. “Earlier this week we got good data on jobs,” Furman said, referring to a 0.1 percentage point decline in unemployment last month to 4.3%. “So the Fed can afford to watch and wait before doing anything.”
Dive Insight:
Traders in interest rate futures, responding to the slower-than-forecast inflation data, expect a faster pace of monetary policy easing by the Federal Reserve in 2026 than they did on Thursday.
Futures traders now see 31% odds that policymakers will make two, quarter point reductions in the federal funds rate by July 29 compared with 27% odds on Thursday, according to CME Group’s FedWatch Tool. They trimmed the odds from 22% to 18% that the main rate on July 29 will be at its current range between 3.5% and 3.75%.
Despite the positive price data, “the Fed is unlikely to cut rates under [Chair Jerome] Powell's leadership unless the labor market data takes a sharp turn lower and fast,” according to economists with Bank of America Securities. Powell’s term as central bank chair expires in May.
“We continue to pencil in two, 0.25 percentage point cuts in June and July, presumably under Warsh's leadership,” the economists said, referring to Kevin Warsh, a former Fed governor nominated to replace Powell.
Warsh and two Fed governors have called for a quicker pace of monetary easing even though inflation persists above the Fed’s 2% target and recent surveys show that high prices are clouding consumer sentiments.
“Concerns about the erosion of personal finances from high prices and elevated risk of job loss continue to be widespread,” Joanne Hsu, director of the University of Michigan’s surveys of consumers, said in a report this month.
Although the mood among households rose this month to the highest level since August 2025, “the overall level of sentiment remains very low from a historical perspective,” Hsu said.
Flat sales at retailers underscore the gloom among consumers.
The Census Bureau said Tuesday that retail spending was unexpectedly flat in December. Sales in stores were little changed after rising 0.6% in November, with furniture outlets, clothing stores and eight other retail categories reporting declines, the Census Bureau said.
Along with inflation, job insecurity poses a threat to consumer sentiments. Job openings fell last month and, during all of 2025, plunged by 966,000 to 6.5 million, the lowest level since Septmber 2020, the Bureau of Labor Statistics said on Feb. 5.
The Fed cut the main rate three times in the final months of 2025 while citing weakness in the labor market.
Since late December, Powell and other Fed officials have said they believe the labor market is stabilizing, bolstering their case to forgo more cuts to borrowing costs until they gain greater clarity on the outlook for prices and employment.
The newest data on the job market bolsters the argument for a wait-and-see approach.
Unemployment fell last month to 4.3%, the Bureau of Labor Statistics said Wednesday, as employers added 130,000 jobs in a hiring surge that far exceeded expectations.
