A key measure of inflation fell to nearly a five-year low last month as apartment rental price growth slowed and gas prices fell, offering some relief to Americans grappling with the sharp cost increases of the past five years.
Inflation dropped to 2.4 per cent in January compared with a year earlier, down from 2.7 per cent in December and not too far from the Federal Reserve’s two per cent target.
Core prices, which exclude the volatile food and energy categories, rose just 2.5 per cent in January from a year ago, down from 2.6 per cent the previous month and the smallest increase since March 2021.
Friday’s report suggests inflation is cooling, but the cost of food, gas, and apartment rents have soared after the pandemic, with consumer prices still about 25 per cent higher than they were five years ago. The increase in such a broad range of costs has kept “affordability,” a topic that helped shape the most recent U.S. presidential election, front and center as a dominant political issue.
And on a monthly basis, consumer prices rose 0.2 per cent in January from December, while core prices rose 0.3 per cent. Core inflation was held down by a sharp drop in the price of used cars, which fell 1.8 per cent just in January from December.
Gas prices fell 3.2 per cent last month, the third drop in the past four months, and are down 7.5 per cent from a year earlier. Grocery prices increased 0.2 per cent in January, after a big 0.6 per cent rise in December, and are up 2.1 per cent from a year ago.
U.S. President Donald Trump’s tariffs have pushed up the cost of some goods, such as furniture, tools, and auto parts, but those impacts may fade later this year. Last month’s inflation of 2.4 per cent was the lowest since last May, just before many tariffs kicked in.
A study released Thursday by the Federal Reserve Bank of New York found that U.S. companies and consumers are paying nearly 90 per cent of the tariffs’ costs, echoing similar findings in studies by Harvard and other economists.
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Many firms may pass along more of those costs to their customers in the coming months, economists warn, which may keep inflation elevated.
Derek Holt, vice president and head of capital markets economics at the Bank of Nova Scotia, said U.S. tariffs especially impacts “main street,” a common economic expression given to average consumers and small to medium sized businesses.
“Tariffs are a tax on Americans paid for by Americans and negate the advantages of last year’s tax reductions through the ‘big beautiful bill’ impacting this year’s tax refund season,” said Holt in a written statement on Friday.
“Further, tariffs disproportionately impact main street while the tax cuts flow disproportionately to upper income individuals with lower marginal propensities to consumer out of an added dollar of after-tax income.”
Rental prices and the cost of owning a home, which make up a third of the inflation index, both rose just 0.2 per cent in December, while rents increased only 2.8 per cent from a year earlier. That is much lower than during the pandemic: Rents rose by more than eight per cent in 2022.
Still, the rental figures were distorted by October’s six-week government shutdown, which interrupted the Labor Department’s gathering of the data. The government plugged in estimated figures for October which economists say have artificially lowered some of the housing costs.
Some items did get more expensive last month. Clothing costs rose 0.3 per cent in January from the previous month, and are up 1.7 per cent from a year earlier. Air fares jumped 6.5 per cent just last month, though they are up a smaller 2.2 per cent compared with a year ago. Music subscriptions soared 4.5 per cent in January and are 7.8 per cent higher than a year earlier.
If inflation gets closer to the Federal Reserve’s target of two per cent, it could allow the central bank to cut its key short-term interest rate further this year, as Trump has repeatedly demanded.
High borrowing costs for things like mortgages and auto loans have also contributed to a perception that many big-ticket items remain out of reach for many Americans.
U.S. markets immediately reversed course early Friday and futures moved into positive territory. The yield on the 10-year Treasury note, which heavily influences mortgage rates, declined on the expectation that lower inflation will allow the Fed to cut rates.
Inflation surged to 9.1 per cent in 2022 as consumer spending soared at the same time supply chains snarled in the wake of the pandemic. It began to fall in 2023 but leveled off around three per cent in mid-2024 and remained elevated last year.
Inflation cooled a bit this fall, though some of that reflected the disruptions of the six-week government shutdown in October. The shutdown disrupted the government’s data collection and led them to estimate price changes in November for housing that most economists say artificially lowered inflation that month.
At the same time, measures of wage growth have declined in the past year or so as hiring has cratered. With companies reluctant to add jobs, workers don’t have as much leverage to demand raises. Smaller pay increases can reduce inflationary pressures as companies often raise prices to offset higher wages.
More modest wage growth is a big reason that many economists expect inflation to continue easing this year.
“We’re not expecting inflation to start up again by any stretch,” said Luke Tilley, chief economist for Wilmington Trust.
Many businesses are still eating some tariff costs and economists expect they may raise prices more in the next few months to offset those extra expenses. Still, most forecast that inflation will decline further by the second half of the year and drop closer to the Fed’s two per cent target by the end of 2026.
– With a file from Global’s Ariel Rabinovitch
© 2026 The Canadian Press
