How should Americans feel about the economy right now? The answer isn’t as simple as the latest numbers might suggest.
January 2026 brought welcome news when annual inflation slowed to 2.4%, the lowest rate since May and below the expected 2.5%. Monthly prices rose just 0.2% after seasonal adjustments. The CPI index reached 325.25 points, showing the economy cooling off a bit.
Inflation dropped to 2.4% in January 2026 while monthly prices crept up just 0.2%, signaling a modest economic cooldown.
Core inflation, which excludes volatile food and energy prices, held steady at 2.6% annually. That’s the lowest since 2021. Shelter costs climbed 0.4% monthly and 3.2% over the year, while energy prices actually dipped 0.1% over twelve months. Food prices edged up slightly, with the food CPI rising to 345.17 points from 343.80. Supply disruptions and higher production costs remain a risk that could push prices back up, particularly in sectors facing shortages of materials and labor cost-push pressures.
But here’s where things get tricky. Multiple forces are gathering that could push inflation higher again. Labor markets face tightening as immigration policies shift and deportation effects intensify. Sectors dependent on migrant workers already feel the squeeze. Home health care costs are rising at a 10% annual rate, near decade highs. When businesses can’t find workers, they raise wages, which eventually shows up in higher prices.
Fiscal policy adds more fuel. The federal deficit could exceed 7% of GDP in 2026, injecting over 1% of GDP in stimulus into an already warm economy. Think of it like turning up the heat when the room is already comfortable. Meanwhile, tariffs have reached levels not seen since the Great Depression. These take time to work through the system, but they’re coming.
Forecasters expect inflation to climb to 2.8% by the fourth quarter of 2026 before settling. Some analysts warn it could exceed 4% if multiple risk factors align. The consensus view that inflation will smoothly descend to the 2% target looks premature. Consumer inflation expectations dropped sharply to 3.1% in January from 3.4% the previous month, suggesting households anticipate continued cooling.
Despite sluggish global conditions, domestic growth appears solid. The S&P 500 rose 111% over six years ending June 2025. February’s inflation nowcast sits at 2.38% year-over-year. Median home prices surged 51% over the same six-year period, reflecting significant asset inflation alongside stock market gains. The economy shows resilience, but celebrating too early might mean missing warning signs ahead.
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