Inflation just took a small step back — and that’s exactly what markets wanted to see.

In January 2026, U.S. inflation slowed to 2.4% year-over-year, down from 2.7% in December. Month over month, prices rose just 0.2%, showing that the heat in the economy continues to fade. Even core inflation — which strips out food and energy — cooled to 2.5% annually, with a modest 0.3% monthly increase.

In simple terms? Prices are still rising… just not as aggressively.

A big reason for the slowdown was energy. Gas prices dropped again in January, helping ease pressure on households. Used car prices also declined, something that would have seemed impossible a couple of years ago.

But not everything is cooling at the same pace.

Housing costs — the heavyweight in the inflation basket — are still sticky. Shelter rose 0.2% in January and remains up about 3% from a year ago. It’s improving, but slowly. Food prices ticked up slightly as well, and eating out continues to cost more than groceries.

So what does this mean for the Federal Reserve?

It strengthens the case for rate cuts later in 2026. Markets reacted quickly, increasing bets that the Fed may finally have room to ease policy if inflation keeps trending lower. Investors aren’t celebrating wildly — but they are breathing a little easier.

The bigger picture:

Inflation at 2.4% is much closer to the Fed’s 2% target than we’ve seen in years. It’s not victory yet, but it’s progress. And for consumers who’ve felt squeezed since 2021, even gradual relief matters.

Now the question becomes:

Can inflation keep drifting down — or is this just a pause before another bump?

For now, the momentum is on the side of cooling prices — and that’s enough to keep rate-cut hopes alive.