/ MARKETS, CPI, FEDERAL RESERVE

CPI Comes in Hot... Wait, Cold - Inflation Drops to 2.4% as Fed Rate Cut Odds Rise

The January Consumer Price Index (CPI) report dropped this morning, and it was exactly what the market wanted to see. Inflation cooled more than expected, sending stocks wavering but ultimately steady as traders bumped up their odds for Federal Reserve rate cuts this year.

The Numbers Don’t Lie

Here’s what the Bureau of Labor Statistics reported this morning:

Monthly changes (seasonally adjusted):

  • Overall CPI: +0.2% in January
  • Core CPI (excluding food and energy): +0.3% in January

Annual changes (not seasonally adjusted):

  • Overall CPI: +2.4% over the past 12 months
  • Core CPI: +2.5% over the past 12 months

For context, December’s annual CPI was 2.7%. That drop from 2.7% to 2.4% is significant - it’s the lowest inflation reading in quite some time. The market had been bracing for something closer to 2.5-2.6%, so this was a pleasant surprise.

What’s Driving the CoolDown?

The energy index actually fell 1.5% in January, which helped headline numbers. Gasoline dropped 3.2% for the month. That’s the kind of relief consumers actually feel at the pump.

Shelter costs - which have been stubbornly high - rose just 0.2% in January. The owners’ equivalent rent index also increased 0.2%. This matters because shelter makes up a huge chunk of the CPI basket (about 40%), and it’s been one of the stickier components.

Food was tame too, with the food index up just 0.2% for the month. Food at home rose 2.1% annually, which is reasonable.

The one area of concern? Airline fares jumped 6.5% in January alone. That’s a big monthly spike, though it’s volatile and tends to bounce around.

What This Means for the Fed

Traders are now pricing in a 50% chance of three Fed rate cuts in 2026, up from expectations of two cuts just last week. The Fed Funds rate is currently in the 3.50-3.75% range after three 25-basis-point cuts in the second half of 2025.

The soft landing narrative just got a boost. If inflation continues to moderate, the Fed has room to keep cutting without worrying about reigniting price pressures.

My Take

Look, I’ve been around long enough to know that one month doesn’t make a trend. But this is the second month in a row of benign inflation readings, and that matters.

What’s interesting is the divergence between the headline number (2.4%) and market expectations. Wall Street was nervous about sticky inflation, and instead we got a clean beat. That’s the kind of environment where stocks can grind higher.

The key will be watching core inflation and shelter costs in the coming months. If shelter keeps climbing at 0.2% monthly, that’s still 2.4% annually from housing alone. But if it continues to moderate, the Fed’s job gets easier.

For everyday Americans, the practical impact is modest but real. Gas prices are down. Grocery bills aren’t spiraling. But shelter costs are still elevated, and that affects renters most directly.

The market reaction was muted today - stocks wavered but held steady. That’s actually healthy. A dramatic rally would have signaled panic buying; this steady performance suggests confidence in the data.

We’ll see if this sticks. But for now, the soft landing looks alive and well.

Sources: U.S. Bureau of Labor Statistics (bls.gov), Federal Reserve Economic Data (FRED), Federal Reserve Board