Inflation returned in January as the Consumer Price Index (CPI) increased 0.5 percent from December, the largest monthly increase in nearly a year and a half, the Bureau of Labor Statistics reported.

Prices in January were 3 percent higher than they were a year earlier. In December, the annual increase was 2.9 percent.

Shelter costs increased 0.4 percent on a monthly basis, and since they are weighted heavily in CPI calculations, they accounted for 30 percent of overall inflation. Energy costs increased 1.1 percent for the month, including 1.8 percent for gasoline and 6.2 percent for fuel oil, though all three measures were lower than they were in January 2024. Food costs went up a bit more slowly than the overall rate, 0.4 percent for the month and 2.5 percent for the year. (Egg prices increased 53 percent over 12 months earlier.)

“We’re really not making progress on inflation right now,” a Wells Fargo senior economist told the Associated Press. “This just extends the Fed’s hold” on reducing interest rates.

Federal Reserve Chair Jerome Powell said as much in Feb. 12 testimony to the House Financial Services Committee, noting that the latest inflation data confirms that “We’re not quite there yet” in reining in inflation, so the central bank is likely to keep rates “restrictive for now.”

The Fed’s target inflation rate is 2 percent.

Adding to inflation fears are President Trump’s plans for mass deportation of undocumented immigrants and aggressive tariffs on all trading partners, including new “reciprocal tariffs” that would be equal to levies that a given country imposes on U.S. products and continued Section 232 tariffs on steel (25 percent) and aluminum (also 25 percent, up from 10 percent). Tariffs of 25 percent on goods from Mexico and Canada have been delayed until at least early March.

While critics charge that the tariffs will have a negative impact on the economy, Trump argues the opposite.

“They can build a factory here, a plant, or whatever it may be, and that includes the medical, that includes cars, that includes chips and semiconductors, that includes everything,” Trump said. “If you build here, you have no tariffs whatsoever. And I think that’s what’s going to happen. I think our country is going to be flooded with jobs.”

In a Feb. 12 social media post, Trump connected his trade plans to monetary policy, writing, “Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets [sic] Rock and Roll, America!!!”

The Federal Reserve is unlikely to agree since tariffs are generally thought to increase inflationary pressures.

During its Jan. 28-29 meeting, the Fed’s Federal Open Market Committee kept the target range for the federal funds rate at 4.25-4.5 percent. This followed decreases in each of the previous three meetings totaling 1 percentage point. The minutes of the January meeting record that “participants observed that the Committee was well positioned to take time to assess the evolving outlook for economic activity, the labor market, and inflation, with the vast majority pointing to a still-restrictive policy stance.”

“Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate,” the minutes stated. They further recorded comments from members of the FOMC that “potential changes in trade and immigration policy” have “the potential to hinder the disinflation process.”

The next FOMC meeting is scheduled for March 18-19. No change in interest rates is expected.

While some of Trump’s policy plans are seen by analysts as potential negatives for the economy, others, most notably reductions in taxes and business regulations, are considered to be much more conducive to growth, creating significant uncertainty about what the overall effect will be.

“If the focus is more on deregulation, tax cuts and potential sweeteners than changes to tariffs and immigration, then growth could be much stronger in 2025,” the chief economist of KMPG U.S. wrote in a report, according to USA Today. “Otherwise, risks are for higher inflation and weaker expansion.”

Stocks may be suffering from the uncertainty. From Jan. 21, the day after Trump’s inauguration, to Feb. 21, the Dow Jones Industrial Average dipped 1.4 percent, while the S&P 500 lost 0.6 percent. Both exchanges experienced significant losses between Feb. 19-21, though, bringing them below pre-inauguration levels.

The economy grew by 2.8 percent in 2024, according to the Bureau of Economic Analysis, ending the year with gross domestic product (GDP) expanding at an annualized rate of 2.3 percent in the fourth quarter.

“The increase in real GDP in 2024 reflected increases in consumer spending, investment, government spending, and exports,” the bureau stated.

The economy created 143,000 jobs in January, below expectations but still enough to reduce the unemployment rate to 4 percent, the Bureau of Labor Statistics reported.

“Job gains occurred in health care, retail trade, and social assistance,” according to the bureau. “Employment declined in the mining, quarrying, and oil and gas extraction industry.”

Federal Reserve Bank of Chicago President Austan Goolsbee, a member of the FOMC, indicated in comments to USA Today that the jobs numbers – which were significantly below the November and December totals – probably would not push the Federal Reserve to cut interest rates to spur the economy.

“This is another month showing stability,” Goolsbee said. “150,000 [jobs] a month is still a pretty solid month.”

Americans’ view of the economy has become a function of their political affiliation. In November, the University of Michigan’s Surveys of Consumers reported that its Index of Consumer Sentiment recorded ratings of 81.3 among Democrats and 69.1 among Republicans. In December – following Trump’s election victory – those numbers reversed, with Democrats at 69.6 and Republicans at 85.4. The disparity has only increased since then. The February index was Democrats 51.3 and Republicans 86.7. (Independents were at 63.1 in November, 70.2 in December and 62.6 in February.)

Overall sentiment fell 10 percent from January to February, which the survey director said was “in large part due to fears that tariff-induced price increases are imminent.” But this was only among Democrats and independents.

The Conference Board’s Consumer Confidence Index declined for the second month in a row in January, slipping 5 percent from December.

“Notably, views of current labor market conditions fell for the first time since September, while assessments of business conditions weakened for the second month in a row,” the board’s chief economist said. “Meanwhile, consumers were also less optimistic about future business conditions and, to a lesser extent, income. The return of pessimism about future employment prospects seen in December was confirmed in January.”

The Institute for Supply Management’s Purchasing Managers Index increased to its highest point since September 2022, reaching a level indicating expansion in the manufacturing sector for the first time in 26 months.

“Demand and production improved and employment expanded,” the chair of the institute’s Manufacturing Business Survey Committee said. “However, staff reductions continued with many companies, but at weaker rates. Price growth was moderate, indicating that further growth will put additional pressure on prices.”

Housing starts sank 9.8 percent from December to January and were 0.7 percent below the January 2024 level, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales in January fell 4.9 percent from December, though they were up 2 percent year over year, the National Association of Realtors reported.

“Mortgage rates have refused to budge for several months despite multiple rounds of short-term interest rate cuts by the Federal Reserve,” the association’s chief economist said. “When combined with elevated home prices, housing affordability remains a major challenge.”