Truflation: US Monthly Inflation Report - January 2026.

Executive Summary

The U.S. economy continues to show notable resilience, entering 2026 on a firm footing. Fourth quarter growth remained solid, driven by strong consumer demand, AI-related investment, and high productivity gains, following a robust 4.4% GDP expansion in Q3 2025. Despite risks stemming from potential trade wars and a cooling labor market, overall economic momentum remains intact.

Consumer spending, the primary engine of the U.S. economy, continues to expand, albeit at a more moderate pace. Real personal consumption expenditures grew at an annualized rate of approximately 2.5%–3.2% in late 2025 and remain a central driver of GDP growth. Most economic outlooks suggest consumer spending will continue to grow in 2026, with forecasts ranging between 1.4% and 2.0% for the year.  

Exhibit 1 – Personal Consumption Expenditure; annualized & monthly growth on SA basis

Source: Bureau of Economic Analysis

However, several areas warrant close monitoring, including labor market conditions, wage growth, and ongoing pressure on household budgets. Credit and debt data indicate a moderate expansion in credit card balances alongside stable delinquency rates, suggesting consumers remain cautious but willing to spend. Overall, this points to a slow and steady growth trajectory.

Recent labor market data show subdued employment growth, with only modest job gains, a trend expected to persist into early 2026. The unemployment rate remains low by historical standards, hovering in the low-to-mid 4% range, reflecting a combination of slower hiring and labor force participation dynamics. Participation has edged lower as some workers exit the workforce, transition to self-employment, retire early, or are affected by immigration policy changes.

Nominal wage growth remains modest, while real wage gains, after accounting for inflation, are flat to slightly positive for many workers. This reflects weaker bargaining power alongside rising productivity, particularly as business investment in artificial intelligence continues to improve efficiency.

Exhibit 2 – Monthly Savings Rate & Truflation Annualized wage growth

Source: Bureau of Economic Analysis & Truflation Wage Tracker

Real wages are likely to improve as inflation continues to ease, but meaningful risks persist. Services inflation and housing costs remain key sources of price stickiness. Additional risks stem from tariffs and supply chain effects. While the full impact of recently increased tariffs has yet to be passed through to consumers, new measures affecting major trading partners such as Canada and Europe introduce further uncertainty and potential headwinds, particularly for the manufacturing sector.

With economic activity remaining resilient, unemployment low by historical standards, and inflation easing, markets continue to anticipate up to three interest-rate cuts in 2026. Such an outcome would be supportive for financial markets and would also help alleviate pressure from public debt, which has risen to approximately $38.5 trillion. As debt levels increase, a growing share of the federal budget is being allocated to interest payments—funds that could otherwise be directed toward public services or long-term investment.

The key challenge for the Federal Reserve in 2026 will be navigating an increasingly complex economic and policy landscape, shaped by deepening political divisions that emerged in the second half of 2025—particularly following the nomination of Kevin Warsh as the next Federal Reserve Chair.

Tariff Impact on Inflation

There continues to be a steady flow of tariff-related developments, particularly involving Canada. This comes shortly after Canada removed retaliatory tariffs on most goods in late 2025. At the same time, President Trump has threatened to impose a 100% tariff on Canadian imports should Canada proceed with a preliminary trade agreement with China.

In Europe, a separate set of trade tensions has emerged. On January 17, 2026, President Trump announced a new tariff regime consisting of an initial 10% tariff—scheduled to rise to 25% on June 1, 2026, on imports from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and the United Kingdom. These measures were linked to those countries’ support for a military presence in Greenland. Subsequently, the U.S. partially walked back the announcement, rescinding the 10% tariff while citing the “concept of a deal” related to Greenland, though it maintained the threat of future tariff increases. Despite this reversal, the European Union suspended work on a key 2025 U.S. EU trade framework, citing aggressive negotiating tactics.

Taken together, the broad contours of current tariff policy are increasingly clear. The degree to which tariff increases ultimately translate into higher consumer prices will depend on how the cost burden is distributed among foreign producers, domestic firms, and consumers. While tariffs are formally paid by importers at the border, the economic incidence can vary widely depending on market conditions and competitive dynamics.

Exhibit 3 – Monthly Gross Receipts & Effective tariff rate (current month as % of previous month import value) 

Source: U.S. Department of the Treasury

Exhibit 4 – Monthly Total Value of Imports

Source: U.S. Department of the Treasury

What is clear is that the value of U.S. imports has retreated from the peaks reached in Q1 2025, returning to the average levels observed in 2024 prior to the introduction of Trump Tariffs 2.0. This pattern suggests that inventory buffers have been drawn down and that firms are reverting to more normalized purchasing behavior.

Second, customs and excise duties paid by importers to the federal government rose sharply beginning in April 2025 and continued to increase through October. Since then, these payments have declined over the subsequent two months, a trend expected to persist into early 2026 before eventually leveling off.

Finally, emerging evidence from Truflation goods price data indicates that prices began rising almost immediately following the announcement of broader tariff measures in April 2025. Prices continued to increase gradually in the months that followed before easing from December 2025 onward. These tariff-related price increases were sufficiently large to have a measurable impact on inflation. We estimate that tariff pass-through to goods prices contributed a cumulative 0.8 percentage points to the Truflation U.S. CPI Inflation Index by November 2025. As a result, while the annual inflation rate stood at 2.3% at the end of November, it would have been closer to 1.5% in the absence of tariffs.

Exhibit 5 – Truflation Goods Prices vs Total Truflation CPI 

That said, the increase in goods prices was relatively modest compared with the announced tariff rates, indicating that the bulk of the tariff burden introduced in 2025 was absorbed by foreign producers and importers, with only limited pass-through to consumers.

Consistent with this assessment, the U.S. Import Price Index from the Bureau of Labor Statistics shows that import prices did rise following the tariff announcements when compared with nonfuel import prices. However, the pace of these increases has cooled materially since March 2025 (see Exhibit 6), suggesting that tariff-related pricing pressures have diminished over time.

Exhibit 6 – US Import Price Index for All Imports and Nonfuel Imports

Source: Bureau of Labor & Statistics

At a high level, the evidence indicates that foreign producers and importers absorbed a substantial share of the higher costs in their margins or drove significant productivity gains, rather than fully passing them on to consumers. Importers also appear to have engaged in defensive pricing strategies to protect market share, particularly in an environment where the U.S. consumer remains the primary engine of economic growth. In effect, firms prioritized volume and market presence over margin preservation.

To evaluate the extent to which tariff increases translated into higher consumer prices, we rely on raw retailer-level data from the Truflation U.S. CPI Inflation Index. Official survey-based price measures are released infrequently and with significant lags, limiting their usefulness for assessing near-term tariff pass-through.

In the months preceding tariff implementation, prices for imported goods were generally trending downward. Following the tariff inflection point, many products shifted onto a sustained upward trajectory, marking a clear break from pre-tariff trends. Retail prices responded quickly to tariff announcements, but adjustments were gradual, with prices continuing to rise over subsequent months. Between March and September, imported goods prices increased by approximately 5% relative to pre-tariff trends.

The pace of these adjustments suggests that retailers priced in anticipated future import costs rather than responding solely to tariffs already paid. Early price increases likely reflected expectations, as retailers were initially selling inventory imported before the tariffs took effect. Moreover, firms did not raise prices in a single step to reflect the full tariff rate; instead, they implemented a series of incremental increases. Elevated uncertainty around the scope, duration, and enforcement of trade measures, combined with concerns about consumer backlash, likely discouraged immediate and full pass-through, resulting in more moderate but persistent price increases.

Price responses varied considerably by country of origin. Among major U.S. trading partners, goods imported from China experienced the largest and most persistent price increases, followed by those from Canada. These differences likely reflect variation in tariff rates as well as the structure of bilateral trade relationships. Canada’s sharper price response relative to Mexico’s is likely linked to its initial retaliatory measures, which heightened perceived trade tensions, while Mexico maintained a more conciliatory approach. Given China’s position as the largest single source of U.S. imports, it is unsurprising that Chinese-sourced goods exhibited the strongest price effects.

Variation was also evident across product categories. Lower-priced goods experienced the largest price increases, reflecting thinner margins and limited capacity for retailers to absorb cost shocks. As lower-income households are more likely to purchase these items, they disproportionately bear the cost-of-living impact associated with tariffs.

Tariff effects extended beyond individual products and reverberated across broad segments of the economy:

• Consumer goods: Clothing, footwear, toys, and electronics categories with high import exposure saw noticeable retail price increases following tariff implementation.

• Automotive sector: Tariffs on vehicles and auto parts (approximately 15–25%) raised production costs, some of which were passed on to consumers. Aggressive promotional activity and inventory front loading, however, helped mitigate the overall price impact.

• Food and agriculture: Imported food products and agricultural inputs, including grains, produce, and livestock feed, experienced higher retail prices at grocery stores.

• Industrial and manufacturing inputs: Tariffs on steel, aluminum, semiconductors, and other inputs increased costs for domestic manufacturers, forcing firms to choose between margin compression and higher prices for finished goods.

On average, imported goods prices rose by roughly 5%, a modest increase relative to the magnitude of announced tariff rates, particularly on Chinese products. Our analysis suggests that only about 20% of tariff changes were reflected in retail prices within six months, well below full pass-through. This muted transmission reflects a combination of margin compression, inventory front loading, productivity gains, and supply chain reorientation to reduce tariff exposure.

Businesses also exerted sustained pressure on exporting producers to lower prices by pursuing productivity gains and renegotiating contract terms. In some cases, firms deepened long-term partnerships through capital investments to secure more favorable pricing. Retailers, especially in the food sector, have increased emphasis on private label products, which are typically priced below branded alternatives. One clear example was Walmart’s Thanksgiving hamper, priced 25% lower than the prior year, reflecting a higher share of own-brand items and a smaller overall basket.

Consumer behavior adjusted accordingly. Households increasingly sought lower-priced alternatives through discount retailers, private labels, or reduced basket sizes. Promotional activity intensified, and competition for consumer spending increased markedly. Car dealerships, in particular, adopted aggressive pricing strategies to accelerate sales and clear inventory ahead of new, tariff-affected stock.

Overall, retailers responded swiftly to tariff announcements, underscoring the rapid transmission of trade policy into pricing behavior. These effects unfolded gradually as consumers, especially lower-income households, adjusted purchasing patterns. While tariffs made a meaningful contribution to inflation, recent downward pressure on goods prices suggests that their inflationary impact may be approaching its near-term peak.

Inflation Update – Goods prices falling off

Given the recent relief in goods prices, combined with typical January behavioral shifts, marked by a sharp reversion from the premiumization of the festive season to more normalized spending patterns, it is unsurprising that Truflation expects inflation to ease this month. This disinflationary trend is further supported by continued reductions in tariffs on Chinese imports, which have fallen from 40–55% to approximately 30–45%, depending on the category.

Truflation’s forecast for the BLS CPI in January is expressed as a range, reflecting the Bureau of Labor Statistics’ annual update to Consumer Price Index expenditure weights, which takes effect with the release of the January data. These updated weights are based on the 2024 Consumer Expenditure Survey and apply to 2026. As a result, Truflation projects January CPI inflation in the range of 2.2% to 2.4% year over year, placing it at the lower end of the current market consensus of 2.5%, with a range of 2.3% to 2.7%.

The significant contributor to cooling inflation has been goods prices. Adjustments in supply dynamics, alongside shifts in consumer behavior, have exerted downward pressure across multiple categories. This trend is consistent with recent improvements in manufacturing activity. The ISM Manufacturing PMI expanded for the first time in 12 months in January, reaching 52.6%, its highest reading since early 2022. After prolonged contraction throughout much of 2025, U.S. manufacturing staged a notable rebound, supported by broad-based gains across transportation equipment, machinery, chemicals, food and beverages, and electronics, signaling stronger activity and rising new orders.

Exhibit 7 – Truflation Year on Year Key Inflationary Metrics: Goods vs Services vs Core.

Services inflation has also cooled, though to a lesser extent than goods inflation. Slowing wage growth is contributing to lower service sector costs, alongside productivity gains and ongoing disruption from AI adoption. According to the ISM Services PMI, easing price pressures have supported continued expansion in the services sector, with new orders, employment, and supplier deliveries remaining in positive territory, albeit at a slower pace than in the prior month. At the same time, inventories and order backlogs remain in contraction. While price pressures have increased, they have done so at a more moderate rate, indicating that cost inflation in services remains present but is gradually easing.

Exhibit 8 – Truflation Year on Year Category Inflation Drivers

In January, the largest upward contributors to inflation were health and education, while food, transportation, apparel, household operations, and housing exerted the greatest downward pressure. This composition reflects shifting consumer behavior alongside continued improvements on the supply side, including the effects of tariff adjustments and easing energy demand.

Sector-Specific Inflation Drivers

• Food: -0.2% MoM I +1.2% YoY. Food prices continue to reflect the post-holiday spending hangover. Each January, consumer spending typically contracts sharply as households revert to more budget-conscious behavior following elevated holiday expenditures. Beyond this seasonal effect, several structural factors are contributing to recent price moderation, including a 1.9% decline in wholesale food prices as measured by the Producer Price Index. Meaningful price declines are emerging in categories such as eggs, dairy, and pork, with further easing expected in 2026 following elevated price levels in 2025. Additional downward pressure is coming from the rollback of certain tariffs, particularly on household goods and imported staples such as coffee and pasta. However, price moderation remains uneven. Categories including beef, fresh vegetables, and non-alcoholic beverages are still expected to experience price increases. Moreover, current declines follow record highs; while the pace of food inflation has slowed, overall food prices remain well above pre-2020 levels.

• Transportation: -0.3% MoM I +1.0% YoY – Transportation costs declined in January, led by lower gasoline prices driven by falling crude oil prices, which have declined for four consecutive quarters amid increased supply. The U.S. Energy Information Administration projects reduced gasoline consumption throughout 2026, partly due to continued improvements in fleet wide fuel efficiency. Vehicle prices held steady in January 2026, reflecting a new equilibrium between inventory levels and consumer demand. Automakers are largely absorbing tariff-related cost pressures rather than passing them on to consumers. Market volatility has eased, and declining interest rates are beginning to offer modest relief for buyers. In contrast, public transportation costs rose in January 2026, reflecting higher operating expenses, ongoing inflationary pressures, and the need for fiscally balanced budgets. In New York City, the base subway and bus fare increased to $3 on January 4, 2026—the first fare hike in more than two years. Rail fares on the LIRR and Metro-North also increased, with adjustments ranging from approximately 4.5% to 8%.

• Clothing: -2.4% MoM I +0.1% YoY – Apparel prices experienced a pronounced decline in January 2026 relative to December 2025, driven primarily by post-holiday discounting and inventory clearance. Although underlying upward pressures persist, prices cooled significantly due to these seasonal dynamics. Additional relief emerged in 2025 following the rollback of certain tariffs on Chinese imports, which helped ease cost pressures. Early 2026 data points to the potential for more sustained price moderation; however, consumer prices are expected to remain elevated overall amid ongoing supply-chain constraints and evolving trade policy dynamics, despite a modest year-over-year increase of approximately 1.7%.

• Household Durables & Daily Use Items: -0.2% MoM I +5.3% YoY – Household durable goods prices in January 2026 are transitioning toward a more predictable, though still elevated, pricing environment, easing from the rapid 4.5% increase recorded in 2025. While tariffs continue to exert upward pressure on costs for items such as furniture (projected to rise 2.2% in 2026) and appliances, stronger competitive dynamics and improved inventory levels are helping to moderate the pace of price increases relative to late 2025.

• Housing: -0.7% MoM I -0.3% YoY – Housing prices declined across all subsegments: owned housing, rentals, and other lodging. Owned housing recorded the smallest declines as rising inventory levels are improving the balance between buyers and sellers. Mortgage rates have remained relatively elevated, generally around 6%, but are expected to ease slightly in 2026, which should support demand. Rental prices also declined, driven by a high vacancy rate holding at 8.6%. In response, landlords are increasingly offering concessions such as free months of rent and reduced move-in costs in early 2026. Overall, housing prices are expected to remain flat or continue cooling as additional supply enters the market.

• Health: +0.2% MoM I +3.2% YoY - Health care prices rose in January 2026, driven primarily by a sharp increase in health insurance costs following the expiration of enhanced ACA tax credits. As a result, Marketplace premiums—particularly for subsidized enrollees—have more than doubled for many households. Medicare costs also increased due to higher Part B premiums and deductibles. While some prescription drugs are benefiting from negotiated price reductions, others continue to see price increases. Reduced Medicaid funding is adding further upward pressure on overall health care costs, and experts warn that rising premiums could prompt healthier individuals to drop coverage, potentially exacerbating cost pressures over time.

• Education: +0.4%, +2.8% YoY – Education prices continued to rise in early 2026, reflecting persistent inflation, reduced government funding, and higher operating costs for educational institutions. Education inflation remains above the broader inflation rate, continuing a multi-year trend of above-average price growth in this category.

Inflation Outlook: Short to Medium Term

The official short-term inflation is expected to remain above the Federal Reserve’s 2% target but should gradually moderate as disinflationary forces continue to build. Improving supply chain conditions, partial tariff rollbacks, and normalization in goods pricing are helping to ease inflationary pressures, even as consumer demand remains resilient. Taken together, inflation is expected to hover in the 2.0%–2.4% range over the near term, reflecting a slow but steady convergence toward the Fed’s objective rather than a rapid decline.

• Tariffs: Assumed to be fully baked in, and unless companies decide to make another round of passing on the costs to consumers, pushing inflation upwards. Even if this is to be the case, which is unlikely, it is expected to have a minimal impact. 

• Demand & Supply: While supply chains ease, constrained labor supply and strong demand keep upward pressure on prices.

• Wages: Continued wage inflation will spur further inflation

• Government Policy: The Big Beautiful Bill's impact on tax relief could spur inflation. 

Recent survey data suggests that inflation expectations are gradually becoming better anchored, reinforcing the outlook for moderation rather than reacceleration. The New York Fed’s January Survey of Consumer Expectations indicates that households are slightly more optimistic about the economic outlook for 2026. Both perceptions of current financial conditions and year-ahead expectations improved, with a smaller share of respondents expecting their financial situation to deteriorate.

Importantly, inflation expectations have continued to edge lower. Households now expect inflation to average 3.1% one year ahead, a modest decline from December. Similarly, the University of Michigan’s one-year-ahead inflation expectation has continued to fall, reaching 3.5%, signaling improving confidence that price pressures are easing.

Exhibit 9 – Consumer Inflation Expectations (2% is the Fed Target)

Source: Federal Reserve Bank of New York & University of Michigan

Conclusion: Inflation to remain volatile

While official inflation numbers are likely to remain modestly above the Federal Reserve’s 2% target in the short term, the balance of evidence points toward gradual normalization. Cooling goods prices, easing supply constraints, and more stable inflation expectations are helping to offset persistent wage and demand-driven pressures in services. Barring a significant policy or demand shock, inflation appears on a slow but steady path toward the Fed’s target range rather than a renewed upswing.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on January 2026

TF 2026 - Inflation Report - US - M1 - Presentation.pptx

TF 2026 - Inflation Report - US - M1 - Presentation.pptx.pdf

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About Truflation

Truflation provides a set of independent inflation indexes drawing on tens of data partners/sources and millions of product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.94% accuracy in predicting inflation in the last 12 months.