The U.S. economy is in a delicate balance, with inflation figures set to be released on Friday potentially revealing a five-year low. This comes as a relief to many, especially after the significant price hikes Americans have faced over the past five years. But here's where it gets controversial: while rental costs have cooled, the overall cost of living remains high, and some prices are still moderating.
The latest government report on consumer prices is expected to show an annual inflation rate of 2.4% in January, down from 2.7% in December. This would be the lowest rate in nine months, and core prices, which exclude volatile food and gas categories, are predicted to decline to 2.5%, the lowest in nearly five years. However, on a monthly basis, inflation may still remain elevated, with overall and core prices expected to rise 0.3% in January from December.
The Federal Reserve's target of 2% inflation could be within reach, which could allow the central bank to cut its key short-term interest rate further this year. However, high borrowing costs for mortgages and auto loans have contributed to a perception that many big-ticket items remain out of reach for many Americans.
In January, economists expect gas prices to have declined, while the cost of groceries could rise again after they jumped in December. Overall prices could increase by more than expected, because costs often rise more in January than other months as companies reset their prices at the beginning of the year.
Inflation surged to 9.1% 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 3% in mid-2024 and has since barely improved.
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 2% target by the end of 2026.
