Inflation eased in January, but risks of higher prices may linger

Article originally posted on CoStar on February 18, 2026

A cooler-than-expected consumer price index (CPI) report offered markets a welcome surprise last week.

Continued softening in housing costs, lower energy prices and a temporary drop in used-car prices led to a 0.2% monthly increase in January price levels, bringing the annual reading down to 2.4% from 2.7% in December.

Core inflation, which excludes the more volatile energy and food categories, fell to 2.5%, its lowest annual reading since March 2021. However, the monthly increase in core prices rose 0.3%, up from December’s 0.2% growth.

While the report shows clear signs of progress toward the Federal Reserve’s 2% annual inflation target, one month’s report is unlikely to move the central bank from its wait-and-see approach to interest rate cuts, particularly considering a stronger-than-expected January jobs report. That release showed the unemployment rate falling to 4.3%, suggesting the labor market may not need the help of further cuts right now.

Keeping inflation in check is also a Fed priority. The group’s preferred measure of inflation, the core personal consumption expenditures (PCE) price index, which was delayed by the federal government shutdown, had been running slightly higher than the CPI. Core PCE has historically run about 0.2 to 0.4 percentage points lower than the overall index. November’s core PCE reading of 2.8%, the most recent available, exceeded core CPI of 2.6%.

Though economists expect core PCE to return to its typically lower monthly growth rate in the coming months, lingering delays related to the federal government shutdown will push the release of January PCE data until March to help confirm that.

The two indices apply different weights to the impact of housing disinflation, which has been a key driver of slowing inflation. While housing accounts for more than 40% of the core CPI, it accounts for less than 20% of the core PCE price index.

Shelter inflation slowed to 3% in January 2026, down from 3.2% in December and well below the 4.4% recorded in January 2025. Data collection issues from last fall’s government shutdown will likely lead to an upward blip in this measure once corrected in the spring. However, shelter disinflation is all but guaranteed to continue in the longer term through 2026.

That’s because the shelter inflation index typically lags shifts in market asking rents by nine to 12 months, and apartment asking rents — a significant component of shelter prices — have been essentially flat over the past year, according to CoStar data.

The decline in shelter inflation helped slow overall services inflation in January’s CPI report. However, a handful of other services saw significant cost increases in January. Services excluding shelter rose by about 0.8% in January, and annual non-shelter services inflation was flat at a hefty 3.4%.

Many of the monthly increases in this category, which accounts for about 29% of the overall consumer price index, likely reflect companies and other service providers resetting their prices at the start of the new year.

Increases included a 7.4% increase in parking fees, a 6.5% rise in airline fares, a 5% increase in car and truck rental costs, a 4.9% rise in motor vehicle fees and a 4% increase in the cost of public transportation. The monthly increase in non-shelter services was similar to previous January readings of 0.8% in 2025, 0.9% in 2024 and 0.8% in 2023.

Core goods price growth was essentially flat over the month, slowing to an annual pace of 1.1%. That prompted some economists and analysts to call a peak in the tariff-driven goods inflation. That boost had lifted core commodity prices from disinflation in 2024 to a peak of 1.5% annual growth in September 2025.

While many economy watchers expect tariff policy to be less volatile this year, the 1.8% monthly decline in used car prices may have had a more significant impact on January’s cooling. Though inflation for overall core commodities excluding energy and food cooled, core commodities excluding used cars and trucks ticked up 0.4% monthly and 1.6% year over year.

The same calendar-year price changes may be at play in some of these goods categories as well, which could lead to cooler increases in the coming months. However, lower prices for used cars and trucks are unlikely to constitute a new trend. Auction sales data show a modest increase in wholesale used car prices in January, which could flow through to consumer prices in the coming months.

Of course, core commodities account for less than 20% of overall inflation. The much larger core services categories will likely set the pace for overall inflation. Labor cost growth, the key driver of services inflation, appears to be on a cooling trajectory. According to the fourth-quarter 2025 employment cost index, unit labor costs, which include wages and benefits, are rising at 3.4%, down from 3.8% a year prior.

Most economists believe that any impact of tariffs on consumer prices is largely in the rearview mirror. But recent media reports citing major U.S. retailers suggest that price hikes are likely still to come, as their efforts to hold prices stable during the holiday season in 2025 have ended, and their capacity to continue absorbing higher costs, including costs of services unrelated to tariffs, wanes.

There may be some evidence of this to come. Several researchers track the trajectories of online prices for consumer goods at a micro level, among them a team at Harvard University and elsewhere that has been monitoring daily online prices for 350,000 products across a number of major U.S. retailers.

Their recent findings show that prices of imported goods rose continuously from April through October of last year, with a short respite through the end of the year, and these are now on the upswing again. These prices are almost 7 percentage points higher than their pre-Liberation Day growth trend predicted.

At the same time, prices of domestically produced goods also rose in the same April-through-October period, though at a slower rate, and have remained mostly flat since then. These prices are almost 4 percentage points below the predicted pre-Liberation Day growth trend.

Should the rise in retail prices of imported goods continue into the spring, future inflation reports may not be as sanguine as the first one of the year.