Inflation measure falls to nearly five-year low as gas prices fall and housing costs cool

U.S. inflation dropped to a near five-year low in January, offering some relief to Americans who have faced persistent price increases since the pandemic. Consumer prices rose 2.4% from a year earlier, down from December’s 2.7% rate and approaching the Federal Reserve’s 2% target, according to data released Friday.

Core inflation, which excludes volatile food and energy categories, increased by just 2.5% year-over-year, the smallest rise since March 2021 and a decline from December’s 2.6%.

The monthly figures showed consumer prices increasing 0.2% in January from December, while core prices rose 0.3%. A significant drop in used car prices, which fell 1.8% in the month, helped restrain core inflation.

“Inflation continues to decelerate and is not threatening to move back up, and that will enable more rate cuts by the Fed,” said Luke Tilley, chief economist at Wilmington Trust.

Despite the positive trajectory, many Americans continue to feel the cumulative impact of price increases, with overall consumer prices approximately 25% higher than they were five years ago. The persistent affordability concerns have remained a central political issue in the country.

The report revealed mixed signals about the effects of President Trump’s tariff policies. Some categories showed clear price increases that economists attribute to the tariffs. Furniture prices jumped 0.7% in January and are up 4% year-over-year. Appliances rose 1.3% in the month, while clothing prices increased 0.3% from December and 1.7% from last year.

Service prices saw increases in certain areas, with airline fares soaring 6.5% in January alone, though they’re only 2.2% higher than a year ago. Music streaming subscription costs rose 4.5% for the month and are up 7.8% from January 2023.

However, these increases were largely offset by price decreases in other sectors. Beyond used cars’ sharp decline, gas prices fell 3.2% in January, marking the third decrease in four months, and are down 7.5% from a year earlier. Grocery prices increased a modest 0.2% for the month and are 2.1% higher than last January. Hotel rates dropped slightly by 0.1% and have fallen 2% year-over-year.

Housing costs, which represent about a third of the inflation index, showed signs of moderation. Rental prices and homeownership costs both rose just 0.2% in December. Annual rent increases have slowed dramatically to 2.8%, far below the peak of more than 8% seen in 2022.

While Trump’s tariff policies have raised concerns about broader price increases, the impact has been less widespread than many economists feared. A recent study by the Federal Reserve Bank of New York found that U.S. companies and consumers are bearing nearly 90% of the tariffs’ costs, confirming similar findings by Harvard and other economists.

“We don’t think consumers are in a place to take on price increases across the board, so you’re not seeing those price increases,” Tilley noted. He pointed to weaker hiring last year, which has slowed wage growth, and ongoing consumer pessimism about the economy.

American businesses continue to navigate the complex tariff landscape. Arin Schultz, chief growth officer at Naturepedic, an organic mattress manufacturer in Cleveland, expressed relief when Trump postponed import duties on upholstered furniture until 2027, which would have significantly increased the cost of headboards the company imports.

Schultz also welcomed the decision to lower tariffs on imports from India to 18% from 50%, as Naturepedic sources many cotton fabrics and bedding from there. However, the company still faces higher costs from duties on imports from Vietnam and Malaysia, where it sources organic latex unavailable in the United States.

“We’re paying more now for that,” Schultz said, noting that the company raised prices about 7% last year as a result. “Tariffs are awful. We are less profitable now as a company because of tariffs.”

If inflation continues its downward trend toward the Federal Reserve’s 2% target, it could give the central bank room to cut interest rates further this year, potentially addressing high borrowing costs for mortgages and auto loans that have contributed to affordability concerns.

After surging to 9.1% in 2022 amid post-pandemic spending and supply chain disruptions, inflation began falling in 2023 but stalled around 3% in mid-2024. Meanwhile, wage growth has slowed as hiring has decreased significantly, reducing workers’ leverage in demanding raises.