Inflation rose in January, putting more pressure on Americans’ household budgets as the Federal Reserve considers delaying its plans to lower interest rates.

The Labor Department reported that the Consumer Price Index (CPI), which tracks the cost of everyday items like gasoline, groceries, and rent, climbed 0.5% in January. On an annual basis, inflation reached 3%, marking the highest level since June 2024.

Both the monthly and annual CPI figures were higher than analysts’ forecasts. Economists had predicted a 0.3% monthly increase and a 2.9% annual rise, but January’s data exceeded those expectations, as well as last month’s numbers of 0.4% and 2.9%, respectively.

Core inflation, which excludes volatile items like food and energy to focus on underlying price trends, increased 0.4% in January and rose 3.3% year-over-year, surpassing predictions. Analysts had expected a 0.3% monthly gain and a 3.1% annual increase. This was a higher-than-expected jump compared to the previous month’s figures.

Despite progress in reducing inflation over the past two years, the data indicates that price pressures remain strong in the U.S. economy, delaying a return to the Federal Reserve’s 2% inflation target.

The high inflation rate has put a strain on American families, especially those with lower incomes. These households are more affected by rising costs of basic necessities like food and rent, which consume a larger portion of their budgets.

Key Areas of Inflation:

• Energy Prices: Energy costs rose by 1.1% in January, slower than the 2.4% increase seen in December. Gasoline prices were up by 1.8%, and natural gas prices also increased by 1.8%.
• Food Prices: Food costs rose 0.4% in January. The cost of food at home jumped 0.5%, largely due to a 15.2% surge in egg prices. In contrast, prices for fruits and vegetables decreased by 0.5%, helping offset the rise in overall food prices. Food away from home increased by 0.2%, with limited service meals rising by 0.3% and full-service meals by 0.1%.
• Housing Costs: Housing prices increased by 0.4%, contributing nearly 30% of the total monthly CPI increase. Shelter prices are up 4.4% year-over-year, marking the smallest increase since January 2022.
• Transportation Costs: Transportation prices grew 1.8% in January and are up 8% compared to last year. A major driver was car insurance, which rose by 2% in January and 11.8% annually. Airline fares also saw a 1.2% increase, with a 7.1% year-over-year rise.

Federal Reserve’s Response: The January inflation data comes after the Federal Reserve paused its interest rate cuts at its last meeting, leaving the federal funds rate between 4.25% and 4.5%. Federal Reserve Chair Jerome Powell indicated that the central bank is in no rush to reduce rates further and will closely monitor inflation and employment data in the coming months to guide its decisions.

Experts’ Viewpoint: Bill Adams, chief economist at Comerica Bank, noted that some of the January inflation spike was due to temporary factors, such as rising egg prices caused by avian flu and higher fuel oil prices due to a cold snap and sanctions on Russia. However, other price increases suggest that businesses are adjusting prices to cover rising costs from 2024.

Adams also pointed out that the Federal Reserve is likely to see January’s inflation data as a signal that price pressures persist, potentially leading to a slower pace or an end to rate cuts in 2025. Additionally, factors like higher tariffs, stricter immigration policies, and proposed tax cuts could further increase inflation, influencing the Fed’s future decisions on interest rates.

Markets have responded to the data by raising the likelihood of the Fed keeping rates steady at its March meeting, with the probability now at 97.5%, up from 95% just a day earlier.