U.S. inflation measure falls to nearly five-year low as gas prices fall and housing costs cool

U.S. consumer prices increased less than expected in January, but underlying inflation firmed as businesses raised prices at the start of the year, which together with a stabilizing labor market could allow the Federal Reserve to keep interest rates unchanged for a while.

Inflation dropped to 2.4 per cent in January compared with a year earlier, down from 2.7% in December and not too far from the Federal Reserve’s 2% target. Core prices, which exclude the volatile food and energy categories, rose just 2.5% 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% 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% 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.