Inflation Eases in US as Prices for Used Cars Fall

The Numbers Game: Inflation Eases, But Is It All Good News?

Inflation in the US has taken a breather as prices for used cars and energy have dropped. According to the Department of Labor, the consumer price index (CPI) slowed down from 2.7% to 2.4% over the past year.

Rate Cut Hopes Rise

You might think this is new, but the drop in inflation could add fuel to arguments that the Federal Reserve has room to cut interest rates without worrying too much about spiking prices. Neil Birrell from Premier Miton Investors said, “The US economy looks to be in fine fettle with growth strong, inflation stable, the job market looking firmer and a Fed that has room to manoeuvre.” But there’s more to it than meets the eye.

The Tariff Tangle

But don’t get too excited. Some analysts have warned that further progress toward the 2% target could stall if companies start passing on the costs of tariffs to consumers. Atakan Bakiskan, an economist at Berenberg Bank, said, “The effects of tariffs remain uncertain and other data quirks could be affecting January’s figures.” However, he added, “For now, there are limited signs of any impact from tariffs, as prices for commodities, stripping out food and energy, held steady last month.”

Services and Groceries

Prices for personal services like dry cleaning and haircuts rose 1.6% in January compared to December. Cigarette prices jumped too, along with airfares and music streaming subscriptions. But not all was gloom.

Rents fell by 0.2%, cooling from a previous month’s pace of 0.4%. Used cars and trucks saw a drop of 1.8%, while energy prices slipped 1.5% over the month.

Even key grocery staples showed signs of moderation. Steak prices dropped more than 2% from December to January, though they are up nearly 13% year-on-year.

Egg prices fell by over 34% from January 2025. The White House was quick to celebrate the report, saying, “The US economy is unbelievable” and that it would “turbocharge even further” if the Fed cut rates.

What’s Next?

The US economy is growing, but where are all the jobs? Job growth last month was stronger than expected. However, the White House faces political pressure over its handling of the economy.

Markets reacted with a muted response to the inflation report, expecting a rate cut in June.

So, while January’s data might ease the path towards lower rates sooner rather than later, there are still clouds on the horizon. As Birrell put it, “The US economy looks to be in fine fettle with growth strong, inflation stable, the job market looking firmer and a Fed that has room to manoeuvre.” But the devil is always in the details.