US inflation slows, Fed may cut rates more than the market prices in

13 February 2026 at 14:38 UTC

• US headline inflation rose by 0.2 per cent month on month and 2.4 per cent year on year, slightly below expectations
• Core inflation stood at 0.3 per cent month on month and 2.5 per cent year on year, confirming gradual disinflation
• Rent growth slowed to 0.2 per cent, while tariff effects remained limited
• Markets reacted moderately, with lower US yields and Fed Funds futures pricing in nearly two and a half cuts

January’s inflation report in the United States delivered a moderately positive signal for financial markets. Consumer prices rose by 0.2 per cent month on month and by 2.4 per cent year on year, slightly below market consensus. Core inflation, excluding energy and food, increased by 0.3 per cent month on month and 2.5 per cent year on year, in line with analysts’ expectations.

Importantly, the pattern seen in previous years, when January readings repeatedly surprised to the upside, did not reappear. At the beginning of the year, firms often revise their price lists, which in periods of strong cost pressure had previously led to marked increases in inflation indicators. This time, the effect was limited, suggesting that price pressures are gradually easing.

The impact of tariffs on overall price levels remains moderate. In selected categories, such as audio and video equipment, above average price increases are visible. However, overall goods prices excluding energy and food were unchanged compared with the previous month, as was already the case in December.

Stronger increases were recorded in the services sector, where prices rose by 0.4 per cent month on month. This was partly due to significant volatility in air fares, which climbed by 6.5 per cent. More importantly, rent inflation slowed markedly to 0.2 per cent, as housing costs had been a key factor sustaining elevated core inflation in previous quarters.

The trend in core inflation continues to point towards a gradual moderation in price dynamics. The disinflationary process is progressing slowly, but the overall direction remains consistent with policymakers’ expectations.

For the Federal Reserve, the current report is relatively comfortable. On the one hand, the feared surge in prices at the start of the year did not materialise, confirming that the impact of tariff increases remains limited. On the other hand, inflation has not fallen sharply enough to justify an immediate easing of monetary policy.

In this context, the central bank can keep interest rates unchanged in the coming months and wait for additional data. Rate cuts at the next two meetings therefore appear unlikely, as policymakers will want to ensure that the downward trend is durable and broadly embedded across the economy.

In the medium term, however, the prospect of monetary easing remains realistic. If inflation continues to moderate gradually, supporters of the view that tariffs have only a temporary impact on prices will gain further credibility.

The baseline scenario assumes that the rate cutting cycle begins in June, with a total of four interest rate cuts by the end of the year. This would represent a more decisive easing than is currently priced in by financial markets. In such a scenario, the Fed would gradually shift from a neutral stance to a more dovish one, supporting economic activity while continuing to monitor the pace of disinflation and longer term price stability.

The release triggered a moderate but noticeable reaction in financial markets. EURUSD rose from around 1.1860 to 1.1880, signalling a slight weakening of the US dollar. Gold climbed from approximately 4960 USD to 5000 USD per ounce, reflecting increased sensitivity to the prospect of looser monetary policy in the months ahead. Futures on the SP 500 edged higher, indicating a mildly positive reception from equity investors.

A more pronounced move was visible in the bond market. Yields on US Treasury securities declined noticeably, with the ten year yield falling below 4.07 per cent, compared with around 4.12 per cent earlier in the day. The drop in yields suggests that investors have begun to price in a greater likelihood of interest rate cuts later this year.

The futures market reaction was relatively measured. Fed Funds futures currently price in close to two and a half rate cuts for the remainder of the year.

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Łukasz Zembik has 13 years of experience in the financial markets. He specialises in foreign exchange and commodity markets, with a particular focus on central banks’ fiscal policies. He’s a regular market commentary contributor to leading Polish financial publications as well as international media outlets such as Reuters and Bloomberg. As a financial markets commentator, he combines both fundamental and technical analysis in his market approach.

Łukasz is the author of several educational resources on investing and financial markets for OANDA TMS clients. He also created a popular Live Trading webinar series in Poland, offering practical insights into real-time market dynamics and trading strategies.