Price hikes eased off less than expected in January, but still offered a hint of relief for Americans who have suffered through some of the steepest price hikes in four decades.

The first measure of inflation for 2024, the Consumer Price Index, showed that prices rose by 3.1% for the 12 months ended in January, according to Bureau of Labor Statistics data released Tuesday. That marks a step back from December’s 3.4% rate and a dramatic cooling from the 6.4% increase seen in January 2023.

On a monthly basis, CPI rose by 0.3% in January, with stubbornly high shelter costs accounting for two-thirds of the gain, according to the BLS.

Falling gas prices helped out consumers’ wallets last month; however, food prices rose 0.4% from December, the highest monthly rate in a year. While food prices are no longer outpacing overall inflation, they’re hitting the hardest at the restaurant level, where inflation is up 5.1% annually, versus the grocery store, where prices are 1.2% higher year-over-year.

Monthly food price changes are volatile and can be influenced by a variety of factors, including weather events and disease, but they moved in the wrong direction for many Americans.

“Food prices kept going up, and that’s a real pain point,” Robert Frick, corporate economist with Navy Federal Credit Union, told CNN. “There’s the rate of inflation, which is coming down, then there’s the weight of inflation, which continues to mount. So even if you have 3%, that’s 3% on top of a mountain of inflation people are already carrying.”

Economists were expecting inflation to ease to 0.2% from December and slow to 2.9% annually, according to FactSet consensus estimates.

Overall inflation, as measured by the Consumer Price Index, has risen at 3% or above for 34 months in a row — the longest streak since the late 1980s and early 1990s.

“Of course [3%] is an arbitrary measure, but that’s the way that humans think about it” in hopes that it shows clear progress, Frick said.

Still, the January CPI report marked “significant progress” in the fight to bring down inflation, Treasury Secretary Janet Yellen said Tuesday during an address in Pittsburgh.

“Overall inflation is down by around two-thirds since its peak; the prices of key household expenses like gas, egg[s] and airline fares have gone down,” she said, noting CPI inflation is down 6 percentage points from its peak.

While the CPI is a closely watched measure of how inflation is affecting consumers in their day-to-day living expenses, the Fed uses the Personal Consumption Expenditures price index as the basis for its 2% inflation target. In December, the PCE price index and the core PCE price index were up 2.6% and 2.9% annually, respectively.

The Commerce Department will release January PCE data on February 29.

Car prices drop but shelter costs still climbing

Annual price increases surged post-pandemic, peaking at 9.1% in June 2022. In its battle to bring down that inflation, the Federal Reserve introduced 11 aggressive rate hikes, starting in March 2022, meant to crush demand and discourage spending.

Excluding the more volatile categories of food and energy, the core CPI index rose 0.4% from December, and the annual rate didn’t budge from the 3.9% increase reported a month before.

Tuesday’s CPI report showed that used car prices fell as expected in January, tumbling 3.4% on a monthly basis, reflecting declines in wholesale prices and pulling back from the increases seen in November and December.

“On the goods side, you basically have zero inflation, month to month and year on year,” Dana Peterson, chief economist at the Conference Board, told CNN in an interview. “What’s keeping inflation from falling faster, it’s all on the services side.”

Inflation can be much “stickier” in services-oriented businesses, particularly because of the heavier influences of wages and other labor costs. It’s one of the reasons why restaurant price inflation is up 5.1% annually versus the 1.2% year-over-year gain at the grocery store.

There’s also a ratchet effect: Once prices go up for that hair cut or vet visit, they don’t typically move back down.

However, one of the biggest drivers of services inflation is one of the biggest and most essential items for Americans: shelter.

The CPI’s measurement of shelter costs does come with a delay from the timing in how BLS captures the data (which is largely by measuring rental leases as well as the implicit rental value of owner-occupied properties). There’s also a natural lag effect, as leases are typically renewed every 12 months or so.

Beyond the mathematical factors, what’s happening in real life isn’t helping as much as initially expected: Rent prices are moderating some but not enough; plus, home prices didn’t fall as expected — instead, they’ve hit record highs.

“Many forecasts had home prices dropping 3% to 4% in 2023; that certainly didn’t happen,” Frick said. “We’re in kind of a ‘Waiting for Godot’ situation here. This drop is just not coming quickly.”

And the longer that and other elements continue to exert upward pressure on overall inflation, the longer Americans will have to endure decades-high interest rates, making buying big-ticket items more expensive and debt even costlier.

Americans’ real wages are growing, as are their confidence levels

Three years of higher-than-normal inflation have taken a toll on consumers’ wallets and their feelings about the economy. Closely watched measurements of consumer sentiment plunged as prices remained elevated.

However, in recent months, both of those aspects have improved: Americans’ wage gains are outpacing inflation, and people are feeling a whole heck of a lot better than they were about the economy.

The Conference Board’s Consumer Confidence Index in January hit its highest level since December 2021. A separate survey on sentiment conducted by the University of Michigan is at its highest reading since July 2021.

And earlier this week, the Federal Reserve Bank of New York delivered some additional good news on the good vibes front: Consumers, by and large, believe that inflation will continue to cool; plus, they’re feeling the most optimistic about their financial futures since before the pandemic.

The share of consumers who believe they will be “somewhat better off” or “much better off” a year from now is the highest since February 2020, according to the New York Fed.

Average real (inflation-adjusted) hourly earnings increased 0.3% on a monthly basis and 1.4% on an annual basis, according to BLS data released Tuesday. It’s the eighth consecutive month of year-over-year real hourly wage growth.

“Today’s report shows that wage growth has been the strongest of any economic recovery in 50 years,” President Joe Biden said in a statement released Tuesday by the White House. “At a time when growth and employment remain strong, inflation declined by two thirds from its peak, but we know there’s still work to do to lower costs.”