US Inflation Details Offer Room for Deeper Fed Rate Cuts

Why It Matters

The softer inflation backdrop gives the Federal Reserve leeway to deepen rate cuts, supporting equity markets and reducing borrowing costs.

Key Takeaways

• CPI rose 0.2% MoM, below consensus
• Core CPI unchanged at 0.3% MoM, four‑year low
• Energy prices fell 1.5% MoM; used‑cars down 1.8%
• Airline fares jumped 6.5% MoM, inflation hot spot
• Markets price 63bp cuts; two cuts expected 2026

Pulse Analysis

The latest CPI report underscores a decelerating inflation trajectory in the United States. Headline inflation slipped to 2.4% year‑on‑year, the lowest since 2022, while core inflation settled at 2.5%, also a four‑year trough. The stability of goods prices, once stripped of food and energy, signals that recent tariff hikes are not translating into broader consumer price pressures. However, import price indices remain stubbornly high, reminding policymakers that supply‑side frictions persist despite the overall calm.

For the Federal Reserve, the data offers a clearer path to monetary easing. The core personal consumption expenditures (PCE) price index, the Fed’s preferred gauge, is likely to echo the CPI’s modest move, especially as airline fares—currently the sole notable driver of price spikes—feed into the producer‑price index rather than the CPI. This creates room for the central bank to consider deeper cuts than the market currently anticipates, potentially moving beyond the two‑cut scenario slated for June and September. Yet, the lingering tariff burden and uneven sectoral price movements, such as the 6.5% jump in airline fares, warrant a cautious approach.

Financial markets have already reacted, pricing in 63 basis points of rate reductions, up from 57 basis points before the release. This dovish tilt is reflected in equity valuations and bond yields, which are adjusting to a more accommodative outlook. Nonetheless, investors should monitor the evolving jobs landscape and any resurgence in commodity prices, as these could re‑ignite inflationary pressures. In sum, the current inflation snapshot provides the Fed with a credible window to lower rates, but the path forward remains contingent on the durability of these early signs of price moderation.

US inflation details offer room for deeper Fed rate cuts

13 February 2026 · Updated: 3 hours ago · James Knightley · Chief International Economist, US

US goods prices, excluding food and energy, were unchanged on the month in January

January US consumer price inflation was marginally lower than expected with headline CPI up 0.2 % month‑on‑month (consensus 0.3 %) while core (ex‑food & energy) came in as predicted at 0.3 % month‑on‑month (0.295 % to 3 dp). This leaves the year‑on‑year rates at 2.4 % for headline and 2.5 % for core, a four‑year low, versus 2.7 % and 2.6 % respectively in December. Energy prices fell 1.5 % MoM while used‑vehicle prices dropped 1.8 %. Virtually all other components were very well‑behaved with housing costs rising just 0.2 %.

The fact that goods prices, excluding food and energy, were unchanged on the month reinforces the narrative that tariffs are not proving inflationary, although there were decent price increases in some of the furniture and appliance categories. That said, import prices aren’t falling and corporates are still paying billions more in tariffs each month versus 12 months ago. Consequently, we are reluctant to rule out some lingering price pressures, particularly with recent trade data suggesting that the pre‑tariff import inventory build has been exhausted, and trade patterns are normalising.

The one true “hot spot” was airline fares, which rose 6.5 % MoM. As such, there is a fair chance we get an even better core PCE deflator print next Friday (probably a 0.2 %) given airfares are derived from the PPI numbers rather than the CPI numbers for that inflation metric. Remember that this happens to be the Fed’s favoured inflation measure.

Markets have reacted dovishly, with 63 bp of Fed cuts now priced versus 57 bp ahead of time. Our view remains two rate cuts this year, in June and September, but with the risk that they do more given the cooling jobs story and increasingly benign inflation backdrop.

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