Inflation Falls Unexpectedly to 2.4% in January

Inflation cooled by a wider-than-expected margin at the start of the new year, falling to its lowest level since early 2021—and raising questions about whether the Federal Reserve will pause interest rate cuts in the near term.

Overall prices increased by 2.4% in the 12 months through January 2026, coming below the majority of economists' expectations, down from 2.7% in December, according to the U.S. Labor Department's Consumer Price Index (CPI) data released Friday.  

Core inflation, which excludes volatile food and energy categories—and is viewed as a better measure of underlying inflation—came in at 2.5% annually, in line with most forecasts.

On a monthly basis, headline inflation measuring total price changes ticked up 0.2%, while core inflation rose 0.3% from the month before.

Realtor.com® Senior Economist Jake Krimmel says Friday's CPI report, which was slightly delayed by the partial government shutdown at the start of the month, offers the cleanest inflation read since last fall's historic shutdown.

The economist says that after December's report, which showed inflation holding steady, January's even softer reading reinforces the idea that inflation is drifting lower, not accelerating.

For the Federal Reserve, the year's first inflation readout, released just days after the latest better-than-expected jobs report, makes it likely that the central bank's policymakers will choose to keep the federal funds rate at its current 3.5%-3.75% range at their next Federal Open Market Committee (FOMC) meeting in March.

Since the fall, risks on both sides of the Fed's dual mandate—keeping inflation close to 2% and ensuring maximum employment—have eased.

Still, Chairman Jerome Powell and his allies have recently emphasized vigilance on price stability in the final stretch of his term at the helm of the Fed.

Financial markets now put the probability of the Fed holding interest rates steady at 90.3%, according to CME FedWatch.

"Inflation is not high enough to force action, but in Powell’s view, it is not yet low enough to justify turning fully toward the labor side either," says Krimmel. "Markets continue to price two cuts this year, and stable or falling inflation is a prerequisite on this divided Committee."

For housing and consumers, easing inflation offers hope, but it comes with key caveats. Krimmel predicts that real income growth from falling inflation and rising wages will boost purchasing power, and with mortgage rates steady around 6.1% for several weeks now, everything is moving in the right direction for improving housing affordability heading into spring. 

However, even with inflation trending down at the moment, nearly five years of elevated price growth have partially eroded income gains and weighed on consumer confidence.

Thursday's existing home sales report showed activity still soft in January, likely influenced in part by inclement weather.

"Moving forward, we will be watching new listing growth and pending sales for a clearer read on demand," says Krimmel. "The foundation for a housing rebound may be taking shape, but rebuilding confidence and moving the needle on affordability will require a sustained stretch of lower inflation and a more certain labor market." 

Housing and gas prices cool

Gas prices decreased 3.2% last month and are down 7.5% from a year ago, helping keep inflation in check. Meanwhile, housing prices increased just 0.2% in January and 3.0% annually, marking a cooldown.

Grocery prices ticked up 0.2% in January and are up 2.1% from a year ago, with costs of eggs, meat, and poultry all going up monthly and annually.

Clothing costs inched up 0.3% month over month and rose 1.7% from a year ago. Airfares climbed 6.5% in January alone