United States: Is Inflation Trending Up Again Even Before Tariffs Are Imposed?

It hasn’t been a good start to 2025 for those hoping to see falling inflation or even lower prices. Last month’s 0.5% jump in the all items index was the biggest increase since August 2023. Food prices are higher. Egg prices surged 15.4% during the month on a seasonally adjusted basis, partly because of the impact of avian flu. Energy prices also rose 1.1%, with fuel oil spiking 6.2%. Growth in gasoline prices exceeded expectations at 1.8%.

The situation is no better if we exclude food and energy. Core inflation increased 0.4%, its biggest jump since April 2023. After stagnating in December, goods prices spiked 0.3%, their largest increase since May 2023. The 2.2% jump in prices of used cars and trucks was a major contributor to this growth. Services less energy services were up 0.5%, the biggest rise since March 2024. Shelter prices edged up, mainly due to lodging away from home and insurance. The index for all items less shelter—up 0.8% in January, its strongest growth in a year—is of greater concern. The adjustments made by the Bureau of Labor Statistics may not have accurately captured some residual seasonal effects. Transportation service prices, including leased cars and trucks and insurance, rose particularly sharply.

Inflation’s recent unwanted trend further justifies the Federal Reserve’s decision to keep interest rates on hold two weeks ago. We expect the Fed to maintain this stance at upcoming meetings. This is also what Jerome Powell suggested at his Congressional hearing.

It’s also important to remember that today’s disappointing print covers the month of January. A lot has happened since then that could influence inflation in 2025. The 10% increase in import tariffs on Chinese products that came into effect on February 4, potential 25% tariffs on goods coming from Mexico and Canada on March 4, tariffs on steel and aluminum that are expected to be imposed on March 12, and an array of other protectionist threats from the White House could drive inflation for the rest of the year and into 2026.

Inflation seems to have stopped falling, and the trend in the all items index is on the rise. While there are some temporary factors behind this shift, it’s important to acknowledge that stubborn inflationary pressure remains. Add to that the impact of President Trump’s protectionist policy on prices, and 2025 could be a tough year for the Federal Reserve. For now, we don’t expect the Fed to cut interest rates any further before the end of the summer.