Inflation Softens, but Fed Rate Cuts Seen on Hold

Key Takeaways

• Inflation eased more than expected at the beginning of 2026, largely driven by price drops for durable goods and energy.
• Economists say lessening inflation for durable goods (like used vehicles and household furnishings) is evidence of minimal tariff pressures.
• Given January’s soft inflation reading and better-than-expected jobs data, the Fed is likely to keep interest rates steady.

The latest Consumer Price Index report shows inflation eased in January, thanks to drops in durable goods and energy prices. The data, which was delayed two days due to the partial government shutdown, showed that inflation rose 0.2% month over month and 2.4% year over year, both slightly better than FactSet’s consensus forecasts and December’s readings. Core inflation, which excludes volatile food and energy prices, rose 0.3% month over month and 2.5% on an annual basis, in line with analyst expectations.

Although the headline numbers improved from December and came in stronger than expected, LPL Financial chief economist Jeffrey Roach advises caution: “When you think about the overall narrative that inflation is decelerating, I don’t think this report was necessarily very confirming. Inflation is holding steady.”

Prices fell for energy, rent, and durable goods, including household furnishings and used cars. “Durable goods have faced a minimal pressure, and that’s a good sign for the uncertainty on what tariffs might be doing,” Roach says. However, airline fares rose by 6.5%, followed by personal care and recreation. Groceries also continue to face upward pressure.

With better-than-expected readings for both the jobs market and inflation, Roach expects the Federal Reserve to stay the course and not cut rates until later in 2026. “At this point, inflation is not reaccelerating, but it’s running hotter than it really needs to, or ought to,” he says. “That’s why I think they’ll hold rates at the next two meetings.”

Evidence of Easing Tariff Pressure as Goods Prices Fall

Ahead of Friday’s report, analysts expected a jump in goods prices as businesses renegotiate supplier contracts at the start of the year and pass the cost of tariffs on to consumers. However, Roach says Friday’s data showed the opposite dynamic: “Tariff impacts are perhaps not as bad as the pundits argued.”

Morningstar senior economist Preston Caldwell says suppliers may still be absorbing tariff-related costs, waiting until the Supreme Court weighs in on the legality of the Trump administration’s tariff policies before passing costs on to consumers. A ruling could come as soon as next week.

Roach says he will be watching next month’s report for continued deceleration in energy and rent prices, plus signs of whether the “nagging influences” of tariffs continue to subside for durable goods. Roach says he remains hopeful that tariff pressures will continue easing. “In 2026, we’ll be past these extreme tariffs and start to see a little bit more certainty about policy,” he explains.

Fed Expected to Hold Rates Steady

With Friday’s modest inflation report and the January jobs report showing a stronger-than-expected labor market, economists say the Fed is likely to pause interest rate cuts at its March meeting.

CME’s FedWatch tool shows more than 90% of market participants expect rates to remain in the 3.50%-3.75% range, while the rest anticipate a quarter-point cut.

The Fed kept interest rates unchanged last month, following three consecutive cuts. The central bank’s next meeting in March will be the first since President Donald Trump announced that he will nominate Kevin Warsh to become the next Fed chair.

Economists had expected a soft January jobs market, which would have firmed the Fed’s attention toward unemployment and opened the door to resuming rate cuts. But labor data released Wednesday showed an improving unemployment rate and hiring, which Roach says allows the Fed to refocus on bringing inflation back to its 2% target.

“Today’s firm inflation data, combined with this week’s solid jobs growth data, means the Fed is extremely unlikely to cut the federal-funds rate in March,” says Morningstar’s Caldwell. “We don’t expect another cut to come until June, in line with current market expectations.”

John Kerschner, global head of securitized products and portfolio manager at Janus Henderson Investors, says the latest labor and inflation data, coupled with strong GDP growth and consumer spending, creates a “gold medal” economy wherein the Fed is unlikely to intervene with further stimulus. “Looking forward, we would expect this environment of relatively strong growth, juiced by higher tax refunds from the One Big Beautiful Bill, an improving job market, and a continued trend of lower inflation, will keep interest rates in a steady range as we await Kevin Warsh’s fresh perspective at the Fed,” he says.