The consumer price index rose 3% on the year in January 2025. Economists worry that broad disinflation is over, even as tariffs loom.The consumer price index rose 3% on the year in January 2025. Economists worry that broad disinflation is over, even as tariffs loom.
Inflation jumped in January on the back of higher prices for consumer staples like groceries and energy. Economists worry inflation has become entrenched above the Federal Reserve’s target, even as President Donald Trump’s policies around tariffs and immigration threaten to exacerbate it.
The consumer price index, an inflation gauge, rose 3% for the 12 months ending in January, the U.S. Bureau of Labor Statistics reported Wednesday.
The January reading is upfrom 2.9% in December. It marks the fourth consecutive month of increases in the annual inflation rate, when it was at 2.4% in September.
“It feels like everything that could go wrong in this report did go wrong,” said Mark Zandi, chief economist at Moody’s.
That said, he cautioned that one month of data doesn’t necessarily make a trend. It would be wise to see a few more inflation reports before ringing alarm bells, he explained.
“I’d send off a yellow flare,” Zandi said. “I wouldn’t send off more than one, and certainly wouldn’t [yet] send off a red flare.”
Broad disinflation appears to be over
The consumer price index, or CPI, measures how quickly prices rise or fall for a basket of goods and services, from haircuts to coffee, clothing and concert tickets.
CPI inflation has declined significantly from its pandemic-era high of 9.1% in June 2022.
However, it remains above the Federal Reserve’s target. The central bank aims for a 2% annual rate over the long term. To get there, economists say inflation readings from month to month should be around 0.2%.
“Inflation has now been around these rates for some time and clearly isn’t coming down decisively any more,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note Wednesday.
The apparent end to the broad period of disinflation in the U.S. is largely a function of the economy’s and labor market’s strength, putting businesses in a position to raise prices more aggressively, Zandi said.
‘The egg shock is enormous’
Price increases were “strong” almost across the board in January, in categories like groceries, gasoline, prescription drugs, vehicle insurance and repair, airline tickets and hotel room rates, Zandi said. The only major category with a decline was apparel, he said.
Grocery prices jumped by 0.5% from December to January, up from a 0.3% monthly rise from November to December, according to the BLS.
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Egg prices soared by 15% just from December to January, according to CPI data. They’re up 53% in the past year, largely due to supply shortages created by a deadly bird flu outbreak, economists said.
“The egg shock is enormous,” said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.
That shock filters through to other grocery items tied to eggs, such as baked goods, economists said.
There’s also a substitution effect: Consumers may opt to switch to other proteins like beef if bird flu drives up the price of eggs and chicken, Seydl said.
Coffee prices have also strengthened amid climate-related issues in the world’s coffee-growing regions, Zandi said. The price of instant coffee, for example, is up about 7% in the past year, according to CPI.
Gasoline prices were up about 2% from December to January, a reflection of higher oil prices. Fuel oil was up about 6% during the month.
Elevated prices for gasoline and diesel can filter through to other areas of the economy, like food, due to higher transport costs for distributors, economists said.
‘Through the worst’ of housing inflation
Housing costs were relatively tame in January, economists said.
Shelter is the largest component of CPI, and movements up and down can have a significant impact on overall inflation readings.
Inflation for both rent and “owners’ equivalent rent” (which measures the price at which a homeowner could rent their residence) stayed level for the month, at 0.3%.
Shelter inflation was 4.4% over the past year, the smallest 12-month increase since January 2022.
“We’re increasingly confident we’re through the worst of the shelter inflation,” Seydl said.
Tariffs would likely raise inflation
Meanwhile, Americans are bracing for potentially higher inflation amid expectations that Trump will impose broad tariffs on trading partners, which generally raise prices for consumers.
Economists expect Trump’s policy priorities like mass deportations and tax cuts would also be inflationary.
Deportations may limit labor supply at a time of low U.S. unemployment, putting upward pressure on wages, while tax cuts may fuel spending if consumers have more money, they said.
“We continue to believe that the Trump Administration’s trade, fiscal and immigration policy agenda would be mildly inflationary,” Bank of America economists wrote in a note on Monday.
That inflationary impact would likely play out in the second half of 2025, though that timeline could move forward if additional tariffs take effect in the next few weeks, the note said.
Tariff threat already impacting auto prices
Tariffs already seem to be buoying prices for automobiles by boosting short-term demand, Seydl said.
The annual inflation rate for new vehicles has drifted upward since October, though remains low around 0%.
“The evidence is becoming much broader about consumers trying to purchase ahead of tariffs,” Seydl said. “I think it’s probably the biggest driver of auto inflation.”
Trump threatened to impose 25% tariffs on Canada and Mexico, for example, as soon as next month. He also signed an order Monday that would impose 25% tariffs on steel and aluminum on March 4.
Most major automakers rely heavily on imports from other countries, including Mexico, to meet demand from U.S. consumers. Ford Motor CEO Jim Farley said Tuesday that Trump’s tariff policy is causing “chaos” for the U.S. auto industry.
For now, evidence suggests the behavior of consumers frontloading their purchases is “very concentrated” in the auto market, Seydl said.
But it could broaden to other categories like consumer electronics and appliances, for example, he said.
A 10% additional tariff on all imports from China took effect on Feb. 4. The bulk of what China exports to the U.S. is consumer goods such as apparel, toys and electronics.
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