The U.S. inflation landscape is set to reveal a fascinating development on Friday, with the potential for core inflation to reach a 5-year low. But here's where it gets controversial: While rental costs have cooled, indicating a moderation in prices, the overall inflation rate remains high, with consumer prices 25% higher than five years ago. This dichotomy raises questions about the true nature of inflation and its impact on everyday Americans.
The latest government report on consumer prices, to be released on Friday, forecasts a 2.4% annual inflation rate in January, down from 2.7% in December. This would be the lowest rate in nine months, with core prices (excluding volatile food and gas categories) expected to decline to 2.5%, the lowest in nearly five years. However, on a monthly basis, inflation may remain elevated, with overall and core prices expected to rise 0.3% in January from December. This could push annual inflation higher if maintained for several months.
The Federal Reserve's target of 2% inflation is a key consideration. If inflation gets closer to this target, it could allow the central bank to cut its key short-term interest rate further this year, as Trump has repeatedly demanded. High borrowing costs for mortgages and auto loans have contributed to a perception that many big-ticket items remain out of reach for many Americans. Economists expect gas prices to decline in January, while the cost of groceries could rise again after a jump in December. Overall prices could increase by more than expected due to the tendency for costs to rise more in January as companies reset their prices at the beginning of the year.
Inflation surged to 9.1% in 2022 as consumer spending soared while supply chains were disrupted by the pandemic. It began to fall in 2023 but leveled off around 3% in mid-2024 and has since barely improved. The fall in inflation this fall was partly due to the disruptions of the six-week government shutdown in October, which disrupted data collection and led to artificially lowered inflation estimates for November. Measures of wage growth have also declined in the past year as hiring has cratered, reducing workers' leverage to demand raises and thus reducing inflationary pressures.
Many economists expect inflation to continue easing this year, with more modest wage growth being a key reason. However, businesses are still absorbing some tariff costs, and economists expect they may raise prices more in the next few months to offset these extra expenses. Most forecasts predict that inflation will decline further by the second half of the year and drop closer to the Fed's 2% target by the end of 2026.
