Inflation cooled in January: Here’s what it means for potential Fed rate cuts and you

The January inflation report is the second positive surprise from the Bureau of Labor Statistics (BLS) in a week. After January’s jobs report showed a steep jump in hiring last month following months of stagnation in the labor market, January’s Consumer Price Index (CPI) report revealed the cost of living didn’t rise as much as expected.

Policymakers, business leaders and investors monitor monthly inflation data closely to understand how the cost of living evolves month to month, which is a key factor in decisions related to trade policy, investment strategy and the Federal Reserve’s (Fed) benchmark interest rate. While inflation has calmed from the immediate post-pandemic years, Americans are still adjusting to a higher cost of living. Pressure to address affordability and legal challenges to the Trump administration’s tariff policies have added more uncertainty to the inflation outlook.

Key takeaways from the January inflation report

Prices are still climbing, but the pace has slowed. The January CPI report showed inflation climbed 0.2% in January and 2.4% over the past 12 months. That’s an improvement from the 2.7% annual rate in December and marks the slowest pace since the first half of 2025. Core inflation, which strips out more volatile food and energy costs, rose 0.3% for the month and 2.5% year over year, the slowest since inflation started to climb in 2021.

Cheaper energy costs helped to offset other household bills. Gas prices fell 3.2% in January, while electricity got a little cheaper and natural gas costs ticked up 1.0% as winter demand pushed utility bills higher. Food prices rose 0.2% for the month, with most grocery categories inching higher. Housing costs, which make up about a third of the index, rose 0.2% in January and 3.0% over the year, still the biggest single contributor to overall inflation in the cost of living.

Paychecks earned 0.3% more purchasing power in January and 1.2% over the past year, as average hourly earnings rose 0.4% and 3.7%, respectively.^,

The White House expects that “with inflation now low and stable, America’s economy is set to turbocharge even further through long-overdue interest rate cuts from the Fed,” according to Deputy Press Secretary Kush Desai following the release of the January CPI report.

Will the January inflation rate have an impact on the Fed’s rate decision in March?

The Federal Reserve balances two goals: maintaining stable prices and keeping as many people employed as possible. When inflation runs hot, the Fed may raise borrowing costs to cool spending and hiring. When the economy weakens, the Fed may cut interest rates to make borrowing cheaper and stimulate business activity.

Right now, inflation is moving in the right direction. At 2.4%, it’s not far from the Fed’s 2% annual inflation target, so policymakers may feel more comfortable lowering borrowing costs. The Fed already cut rates three times in late 2025, bringing the benchmark rate to a range of 3.50% to 3.75%. Policymakers paused those rate cuts in January, but they haven’t established a set path for interest rates this year.

The January jobs report adds another dimension to the decision. Employers added 130,000 jobs in January – significantly more than expected – and unemployment ticked down to 4.3%. The report was a shift from a sluggish 2025, when, according to BLS revisions, employers averaged just 15,000 net new hires per month.

Weather disruptions and seasonal quirks can make any single month’s data noisy, so the Fed will likely look at the larger trend. The job market isn’t bustling – but it’s not collapsing, either. Some analysts expect the central bank to hold rates steady until June, but that depends on how inflation, hiring, tariffs and trade policy evolve this year.

Supreme Court to discuss tariffs in coming days, adding another dimension to inflation outlook

With trade policy a moving target, any sudden changes to tariff policy could add another layer of uncertainty to an already complex inflation landscape.

New research from the Federal Reserve Bank of New York found that nearly 90% of the tariffs imposed in 2025 were paid by U.S. firms and consumers, not foreign exporters. Even so, January’s headline number suggests that tariff pressures remain subdued.

Looking ahead, the Supreme Court’s decision on the International Emergency Economic Powers Act and tariffs case remains pending, with an opinion possible as soon as February 20, the next scheduled opinion day. If the court invalidates the tariffs, prices may not fall immediately due to the well-known asymmetry in price adjustments and pass-through lags. However, removing tariffs would likely ease pressure on corporate profit margins and, over time, reduce adverse impacts on consumers. Conversely, if the administration pivots to alternative tariff authorities or if policy actions shift through Congress, price volatility and margin pressure could persist.

What investors may want to watch next

The next few weeks could affect investor outlooks for the rest of the year. If the Supreme Court discusses tariffs on February 20, the ruling could reshape trade policy, business strategy and inflation expectations overnight.

After that, the February jobs report arrives on March 6, and the February inflation report is due on March 11, one week before the Fed meets. That data will show whether January’s improvement was a one-time dip or the start of a sustained trend.

For most investors, that uncertainty argues for portfolios built around time horizon and diversification rather than quick shifts based on a single report. A mix of assets may help hedge against the reality that inflation, interest rates and tariffs can move in unpredictable ways, often with little warning but with real implications for your investments. Stay informed and speak with a J.P. Morgan financial professional to continue working toward your long-term goals.

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