Tariff passthrough is still visible in the data: Munoz on January U.S. inflation

Key Concepts

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Core CPI: CPI excluding food and energy prices, used to measure underlying inflation trends.
• Super Core CPI: Core CPI excluding shelter costs, providing an even more focused view of inflation.
• Disinflation: A decrease in the rate of inflation.
• Tariff Pass-Through: The extent to which increased tariffs on imported goods are reflected in higher prices for consumers.
• Federal Reserve (The Fed): The central banking system of the United States, responsible for monetary policy.
• Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield (1 basis point = 0.01%).
• Terminal Rate: The expected long-run equilibrium interest rate.

Inflation Report Analysis: January 2026 & Fed Policy Outlook

I. January CPI Data & Initial Assessment

The January Consumer Price Index (CPI) report revealed a slower annual rate of inflation than anticipated in the US. Oscar Munos, Chief US Macro Strategist at TD Securities, characterized the report as “one of the cleanest” received in some time, suggesting a reliable signal of current economic conditions. He stated, “I probably take the signal from this report fairly straight. I don't think there are a lot of blemishes on it.” The report indicated price declines across most sectors, with the exception of transportation.

II. Sectoral Breakdown & Key Observations

• Transportation: While transportation prices showed strength, Munos cautioned against overinterpreting this as a significant trend, noting its inherent volatility.
• Core CPI & Services Inflation: Core CPI inflation, excluding food and energy, came in softer than expected. Even with the strong transportation segment, services inflation was subdued. On a non-seasonally adjusted basis, core CPI experienced its weakest month-to-month increase for January since 2021, returning to pre-pandemic levels. This was described as exhibiting “some green shoots” in the report.
• Food Prices: A decrease in food prices, particularly “food away from home” (restaurant spending), was a surprise. This disinflation in the food services sector was viewed as potentially indicative of a stabilizing labor market, suggesting that labor costs aren’t excessively driving up prices.
• Goods Inflation & Tariffs: The CPI “super core” showed a significant increase of 6% month-over-month, partially attributed to tariff pass-through. Stripping out vehicle prices from the goods basket also revealed a substantial increase. Munos emphasized that the tariff inflation story is ongoing, expecting it to continue impacting prices for the next couple of quarters, but diminishing in significance during the second half of the year.

III. Impact of Immigration Policy

The impact of recent changes in US immigration policy on the cost of goods is difficult to quantify directly. Munos suggested a potential effect on overall demand, particularly within the services sector. He also posited a possible future impact on the housing market, anticipating weaker demand and potentially slowing rent increases if immigration levels remain lower. “If people are not coming into the country, they're not going to look for housing…housing demand could will be weaker and that should be reflected in slowing rents prices.”

IV. Federal Reserve Policy Implications

The January CPI data has not fundamentally altered TD Securities’ expectations for Federal Reserve (The Fed) policy. The firm still anticipates the Fed will ease monetary policy this year, but the rationale is shifting.

• Shift in Rationale: The Fed’s focus is moving from “risk management cuts” driven by labor market concerns to a “disinflation story” expected to become more prominent in the second half of the year.
• Rate Cut Projections: TD Securities projects three 25 basis point rate cuts in June, September, and December, bringing the terminal rate to 3%.
• Labor Market Stabilization: The recent jobs report indicated a stabilization of the labor market, with the unemployment rate falling from 4.6% to 4.3%. This allows the Fed to prioritize its inflation mandate. As Munos explained, “That allows the Fed uh to uh to focus on the other side, right? the other mandate to focus on inflation.”
• Inflation Target: The Fed will likely resume easing if inflation returns to its 2% target. More progress on inflation is expected to be visible in the second half of the year.

V. Data & Statistics Mentioned

• January 2026 Core CPI: Softer than expected, weakest month-to-month print for January since 2021.
• CPI Super Core: Increased by 6% month-over-month, partially due to tariff pass-through.
• Unemployment Rate: Decreased from 4.6% to 4.3%, indicating labor market stabilization.
• Projected Rate Cuts: Three 25 basis point cuts expected in June, September, and December.
• Terminal Rate Projection: 3%.

Conclusion

The January CPI report signals a positive trend towards disinflation in the US economy. While tariff impacts remain a factor, the overall data suggests a return to pre-pandemic inflation levels. This shift is prompting the Federal Reserve to refocus on its inflation mandate, paving the way for potential rate cuts later in the year, contingent on continued progress towards the 2% inflation target and sustained labor market stability. The report provides a relatively clean signal, offering a more optimistic outlook for the US economy in 2026.