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US inflation fell more than expected to 2.4 percent in January, prompting investors to bet on an interest rate cut by the Federal Reserve as price pressures ease in the world’s largest economy.
Friday’s figure from the Bureau of Labor Statistics was down from a 2.7 percent year-on-year pace in December and less than the 2.5 percent expected in a Bloomberg survey of economists.
Falling gasoline prices and falling housing-related costs helped push the numbers down. Core inflation, which strips out volatile food and energy prices, fell to its lowest level in nearly five years.
Ishwar Prasad, an economist at Cornell University, said the combination of relatively low inflation data and strong jobs data earlier this week “had a pronounced impact on rate cut expectations, giving both doves and hawks in the Fed’s circle the opportunity to either cut rates or keep them in place”.
The yield on two-year Treasuries, which tracks interest rate expectations, fell marginally after Friday’s data, falling 0.05 percentage points to 3.42 percent.
Traders in futures markets have increased bets on a third interest rate cut this year, raising the potential probability of such a move to 40 to 50 percent.
Data on Friday showed core inflation fell to 2.5 percent, its lowest level since March 2021. That was in line with Wall Street expectations and down from 2.6 percent in December.
Housing-related costs – which make up about a third of the index and have helped keep overall inflation levels high in recent months – rose at an annual pace of 3 percent in January, down from 3.2 percent the previous month.
Economists welcomed the low inflation data, but cautioned that it was still distorted by last year’s government shutdown, which prevented the BLS from conducting its survey and left a gap in the data.
“This is better news than we expected,” said Diane Swonk at KPMG. “(But) some of this data may still not be as clean as we would like, so we don’t want to jump to too many conclusions, which is why the Fed is in a wait-and-see position.”
Republicans said the low inflation numbers are proof of the success of Donald Trump’s economic policies, despite signs that rising costs of living have hurt the president’s party standing ahead of this year’s midterm elections.
“Today’s report is the latest evidence that the affordability crisis that President Trump inherited is improving for working families,” said House Ways and Means Committee Chairman Jason Smith.
Friday’s release came as the Fed kept rates in the range of 3.5 percent to 3.75 percent in January, following three consecutive quarterly point cuts, with Chairman Jay Powell pointing to stabilization in the labor market.
Employment data released on Wednesday showed the economy added 130,000 jobs last month, nearly double economists’ forecasts, a sign of regaining momentum after a series of disappointing data.
“We are expecting two cuts this year, with the next step coming in June,” said Lindsay Rosner of Goldman Sachs Asset Management. He emphasized that the Fed’s room for maneuver will largely depend on the health of the labor market.
