WASHINGTON (AP) — Consumer inflation in the United States cooled last month yet remained elevated in the latest sign that the pandemic-fueled price surge is only gradually and fitfully coming under control.

Tuesday’s report from the Labor Department showed that the consumer price index rose 0.3% from December to January, up from a 0.2% increase the previous month. Compared with a year ago, prices are up 3.1%.

That is less than the 3.4% figure in December and far below the 9.1% inflation peak in mid-2022. Yet the latest reading is still well above the Federal Reserve’s 2% target level at a time when public frustration with inflation has become a pivotal issue in President Joe Biden’s bid for re-election.

Excluding the volatile food and energy categories, so-called core prices climbed 0.4% last month, up from 0.3% in December and 3.9% over the past 12 months. Core inflation is watched especially closely because it typically provides a better read of where inflation is likely headed.

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Tuesday's report showed that the drivers of inflation have decisively shifted from goods, like used cars, gasoline and groceries, which are now falling in price or rising much more slowly, to services, including hotel rooms, restaurant meals and medical care. That shift could raise concerns for the Fed, because services inflation typically takes longer to cool.

At his most recent news conference, Fed Chair Jerome Powell singled out persistently high services prices as a concern and said the central bank's policymakers want services inflation to ease further before starting to cut their key interest rate.

“There’s still some inflation in the system that’s going to take some time to work through,” said Omair Sharif, founder of Inflation Insights, a research firm. “This justifies the Fed wanting to wait and see how things are going to go."

Biden administration officials frequently note that inflation has plummeted since pandemic-related supply disruptions and significant government aid sent it soaring three years ago. And a raft of forward-looking data suggests that inflation will continue to cool.

The pace of wage growth has slowed, which reduces the pressure on companies to raise prices to offset higher labor costs. And consumers and business owners collectively expect lower inflation in the coming months and years, a trend that can itself hold down price increases.

Still, even as it nears the Fed’s target level, many Americans remain exasperated that average prices are still about 19% higher than they were when Biden took office.

“We have concerns,” White House press secretary Karine Jean-Pierre said Tuesday, about the weaker-than-expected inflation report. She cautioned, however, against reading too much into monthly figures, noting that inflation is down by two-thirds since its peak and core inflation is its lowest since 2021.

“But we certainly understand that there's more work to be done to lower costs,” she said.

Gas, groceries, services costing more

From December to January, average national gas prices tumbled 3.3%, the government said. Yet so far this month, the average price has climbed higher, rising 15 cents to $3.23 a gallon as of Tuesday, according to AAA.

Grocery prices rose 0.4% from December to January, the biggest such rise in a year, though compared with 12 months earlier, food prices are up just 1.2%.

But the costs of services — including auto insurance, apartment rents, and concert tickets — are still rising faster than they did before the pandemic and keeping overall inflation persistently high. The cost of car insurance has soared more than 20%, on average, compared with a year ago.

Such price spikes are causing heartburn for many consumers. Bill Milligan of Atlanta said he was stunned last month to find that the cost of insuring one of his cars had soared nearly 30% compared to six months earlier.

“I was going, ‘What the hell is that?’” Milligan said he thought when he saw the charge on his bank statement.

Milligan, a 46-year-old software architect, called his insurance company, which confirmed that the price increase didn’t reflect any recent tickets or accidents and said he was still receiving a discount for insuring several cars at once.

“And they’re like, ‘Yeah, sorry, it’s just the price of everything is going up,’ ” Milligan said.

Milligan, who said he received a substantial pay raise last year, acknowledged that financially he is still doing fine.

“I can’t complain about this,” he said, referring to inflation overall.

But as with many Americans, higher prices have caused him to worry about the future. He wonders how his oldest of three daughters, who wants to become a schoolteacher, will live on an educator’s salary with costs having risen so high.

Fed will likely stay cautious about rate cuts

The mixed data released Tuesday will likely reinforce the caution of Fed officials, who have said they’re pleased with the progress in sharply reducing inflation but want to see further evidence before feeling confident that it’s sustainably headed back to their 2% target.

Before the report, Wall Street traders had priced in a 61% probability for a rate cut in May. But after Tuesday's inflation data, that probability had sunk to roughly 39%. Most economists still think the Fed will start cutting its rate in June from its 22-year-high of roughly 5.4%.

Another driver of high prices has been housing costs, particularly the price of home ownership. It rose 0.6% from December to January, the biggest one-month jump since April. That measure is 6.2% higher than it was a year earlier.

The cost of apartment rents increased 0.4% last month. Along with a 1.8% jump in hotel costs just in January, overall housing costs rose 0.6% last month and accounted for two-thirds of the total rise in month-to-month inflation.

But housing costs should slow in the coming months. The price of new apartment leases has been declining steadily as new apartment buildings have been completed. It can take months for the drop in new lease prices to feed through into the government's data.

At the same time, economists say that inflation in health care services is likely to stay high. The cost of hospital services jumped 1.6% just from December to January. Doctors' services rose 0.6%.

Sharif said those increases likely reflected, in part, sharp pay gains in recent years for nurses and other in-demand medical workers, such as anesthesiologists and radiologists.

The Fed raised its key rate 11 times, from March 2022 to July of last year, in a concerted drive to defeat high inflation. The result has been much higher borrowing rates for businesses and consumers, including for mortgages and auto loans. Rate cuts, whenever they happen, would eventually lead to lower borrowing costs for many categories of loans.

Lower borrowing costs could boost economic growth. But a strong economy may also pose a challenge for the Fed because faster growth can accelerate wages and consumer spending. If businesses aren’t able to keep up with greater customer demand, they typically respond by raising prices, which would worsen inflation.

In the final three months of last year, the economy grew at an unexpectedly rapid 3.3% annual rate. There are signs that growth remains healthy so far in 2024. Businesses engaged in a burst of hiring last month. Surveys of manufacturing companies found that new orders rose in January. And services companies reported an uptick in sales.

Dow drops after inflation report

U.S. stocks are falling Tuesday after worse-than-expected inflation data forced investors to question hopes that have sent Wall Street to record heights.

The S&P 500 was 1.2% lower in midday trading as traders delayed their forecasts for when the Federal Reserve will deliver the cuts to interest rates they crave so much. The hotter-than-expected inflation report may have put the final nail into hopes that the first cut could arrive in March. It also pushed many forecasts past May into June, according to data from CME Group.

The Dow Jones Industrial Average fell 480 points, or 1.2%, from its record set a day earlier. The Nasdaq composite, which has been flirting with its all-time high set in 2021, was down 1.3%, as of 11 a.m. Eastern time.

High interest rates hurt all kinds of investments, and they tend to particularly hurt high-growth stocks like technology companies. A 1.6% drop for Microsoft and 1.3% dip for Amazon were two of the heaviest weights on the market.

The losses were widespread, with roughly 90% of stocks in the S&P 500 falling in a wipeout. Stocks of smaller companies fell even more than the rest of the market because high interest rates could hurt them more than their bigger rivals by making it more difficult to borrow cash. The Russell 2000 index of smaller stocks dropped 3.1%.

Some analysts warned the inflation data could mean not only a delay to rate cuts but also the possibility that the Fed would raise rates further. The Fed has already pulled its main interest rate to the highest level since 2001 in hopes of grinding down high inflation. High rates work by slowing the overall economy and hurting prices for investments.

Contributing: Joey Garrison of USA TODAY

This article originally appeared on USA TODAY: January CPI report shows inflation continues to fall