In a significant economic development, the United States is poised to see its core inflation rate potentially fall to a five-year low when the latest government report on consumer prices is released this Friday. Economists are forecasting that annual inflation may have decreased to 2.4% in January, down from 2.7% in December, marking the lowest rate in nine months.
Core Inflation Expected to Decline Sharply
Core prices, which exclude the volatile categories of food and gas, are anticipated to decline to 2.5% from 2.6% in the previous month. According to data provider FactSet, this would represent the lowest level in nearly five years, driven largely by a cooling in rental costs. This moderation offers a glimmer of hope for Americans who have been grappling with a substantial 25% increase in overall consumer prices over the past five years, a period marked by soaring costs for essentials like food, gas, and apartment rents since the pandemic.
Monthly Trends and Political Implications
On a monthly basis, however, inflation may remain elevated. Both overall and core prices are expected to rise by 0.3% in January compared to December. If this pace is sustained over several months, it could begin to push annual inflation higher once again. The persistent rise in a broad range of costs has escalated into a high-profile political issue, often discussed under the umbrella of "affordability," putting pressure on policymakers to address economic concerns.
Should inflation move closer to the Federal Reserve's target of 2%, it could pave the way for the central bank to implement further cuts to its key short-term interest rate this year. This is a move that has been repeatedly demanded by political figures, including former President Trump. High borrowing costs for mortgages and auto loans have contributed to a widespread perception that many big-ticket items remain financially out of reach for numerous Americans, exacerbating the affordability crisis.
Economic Factors and Forecasts
In January, economists predict that gas prices will have declined, while grocery costs could rise again after a jump in December. There is also a possibility that overall prices might increase more than expected, as companies often reset their prices at the beginning of the year, leading to higher costs in January compared to other months.
The trajectory of inflation has been tumultuous in recent years. It surged to a peak of 9.1% in 2022, fueled by robust consumer spending and pandemic-induced supply chain disruptions. After beginning to fall in 2023, inflation leveled off around 3% in mid-2024 and has seen minimal improvement since. A slight cooling occurred this fall, though some of this was attributed to the disruptions caused by a six-week government shutdown in October, which affected data collection and led to estimated price changes that artificially lowered inflation in November.
Wage Growth and Future Outlook
Concurrently, measures of wage growth have declined over the past year or so, as hiring has cratered and companies have become reluctant to add jobs. This reduction in workers' leverage to demand raises has resulted in smaller pay increases, which can help reduce inflationary pressures since companies often raise prices to offset higher wages. More modest wage growth is a key reason many economists anticipate inflation will continue to ease throughout the year.
"We're not expecting inflation to start up again by any stretch," stated Luke Tilley, chief economist for Wilmington Trust. Despite this optimism, some challenges remain. Many businesses are still absorbing tariff costs, and economists expect they may raise prices in the coming months to offset these extra expenses. Nonetheless, most forecasts indicate that inflation will decline further by the second half of the year and approach the Federal Reserve's 2% target by the end of 2026.
