The Consumer Price Index rose 0.2% in January on a seasonally adjusted basis, which represents a modest monthly increase. More importantly, the 12-month inflation rate came in at 2.4%, down from 2.7% in December. This continues a gradual cooling trend we’ve seen over the past several months, bringing inflation closer to the Federal Reserve’s 2% target. Assistance from Claude AI.
What’s Driving the Numbers
The report shows an interesting divergence between different categories. Shelter costs, which remain the largest single contributor to overall inflation, increased 0.2% for the month and are up 3.0% year-over-year. This housing component continues to be sticky, meaning it’s declining more slowly than other categories.
Food prices rose 0.2% for the month, with both groceries and restaurant meals contributing. Over the full year, food costs are up 2.9%, which is actually quite moderate compared to the sharp increases we saw in 2022-2023. Within groceries, there’s considerable variation—cereals and bakery products jumped 1.2% in January alone, while egg prices plummeted 7.0% for the month (though this reflects recovery from temporary supply disruptions rather than a permanent trend).
Energy tells perhaps the most striking story. Overall energy costs fell 1.5% in January, driven primarily by a 3.2% drop in gasoline prices. Over the past year, energy is essentially flat (down 0.1%), with gasoline down 7.5% offset by increases in electricity (up 6.3%) and natural gas (up 9.8%). This creates uneven impacts across households depending on their energy consumption patterns.
Core Inflation Remains Elevated
The “core” measure—which excludes volatile food and energy prices—rose 0.3% in January and is up 2.5% year-over-year. This is actually slightly higher than the headline rate, suggesting that underlying price pressures persist even as energy deflation helps the overall number.
Services inflation remains the stubborn component here. Medical care services rose 0.3% for the month and are up 3.9% annually. Transportation services jumped 1.4% in January, with airline fares surging 6.5% (though airline prices are notoriously volatile month-to-month). Personal care services are up 5.0% over the year.
Notable Developments
Several categories caught my attention. Used car prices fell 1.8% in January and are down 2.0% year-over-year, continuing their retreat from the pandemic-era peaks. Motor vehicle insurance, which had been a major contributor to inflation, actually declined 0.4% in January, though it’s still up 0.5% annually.
On the goods side, most categories show very modest price changes. New vehicle prices edged up just 0.1% for the month and 0.4% for the year. Many household goods and apparel items show near-zero or negative annual inflation, reflecting both improved supply chains and potentially softer consumer demand.
The Data Gap
One important technical note: October and November 2025 data are missing due to a government funding lapse. This creates some discontinuity in the time series, though it doesn’t fundamentally compromise the January reading itself.
What This Means
The January report suggests inflation continues moving in the right direction, though progress has become more gradual. The 2.4% annual rate is the lowest we’ve seen since early 2021, before the major inflationary surge began. However, the report also shows why the Federal Reserve likely remains cautious—core inflation at 2.5%, shelter costs at 3.0%, and various services categories running considerably hotter all suggest that price pressures haven’t fully normalized.
The divergence between goods (showing little to no inflation) and services (still elevated) reflects the economy’s transition from pandemic-related supply disruptions to more demand-driven dynamics. As the labor market gradually cools and wage growth moderates, services inflation should eventually follow, but this process takes time.
For households, the picture is mixed. Lower gasoline prices provide relief, grocery inflation has moderated substantially, and many consumer goods are seeing flat or declining prices. However, the costs that hit family budgets most regularly—housing, medical care, insurance, and services—continue rising faster than overall inflation, creating financial pressure that many people feel acutely despite the improving headline numbers.