Kiplinger Inflation Outlook: Moderate Inflation to Continue in the Near Term

Kiplinger Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.

January inflation eased further, to 2.4%, continuing the trend of moderating inflation. It helped that used-car prices declined 1.8% and gasoline prices dropped 3.2%. The 12-month inflation rate for services excluding energy was 2.9%, its lowest reading in nearly five years. The price of eggs continues to drop and is down 34.2% over the past year.

However, there are caveats and risks for the future: Prices of gasoline and used cars and trucks are notoriously fickle, and could turn higher at any time. Car rental costs and airfares both jumped 5.0% or more in January, though that was from depressed levels. The cost of home health care rose 2.1%. Increases in electricity prices have been moderate for the past seven months, but the pressure of new data centers on capacity could start driving prices up again at a faster rate, repeating what happened in the first half of last year.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

The 12-month inflation rate for all prices should continue to ease in February and March, but mostly because strong price increases a year ago raised the base used in the year-over-year calculations. Expect the reported 12-month rate to rebound by a few tenths of a percentage point toward the end of this year, ending 2026 at about 2.6%.

Inflation is subdued enough that the Federal Reserve could continue to cut interest rates if it wanted to. Our guess is that the Fed won’t want to. It is considering developments in the labor market to be more important than inflation right now, at least as long as inflation remains well-behaved. If hiring appears poor, then the Fed may consider another interest rate cut. But the strength of the January jobs report should keep the central bank on the sidelines until midyear, at least.

While the headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a different price measure, called the personal consumption expenditures deflator. The PCE deflator excluding food and energy rose at a 2.8% rate for the 12 months ending in November, the latest data available, compared with the core CPI’s 2.7% number that month. That’s still well above the Fed’s target for 2% inflation over the long term. (The PCE deflator will be updated through December on February 20.)

Related content

• Rising Prices: Which Goods and Services Are Driving Inflation?
• When Is the Next Fed Meeting?
• Why Is the PCE the Federal Reserve's Favorite Inflation Indicator and Not the CPI?