U.S. consumer prices surged more than expected in January amid rises in the costs of shelter and health care and came in above 3% on an annual basis to test the timing of the U.S. Federal Reserve's (Fed) anticipated interest rate cuts, that some economists opine could start in the first half of this year.

The consumer price index (CPI) increased 0.3% last month after gaining 0.2% in December, the Labor Department's Bureau of Labor Statistics (BLS) said on Tuesday. Annual revisions to the CPI data published last Friday were mixed but generally showed inflation was on a downward trend after surging in 2022.

In the 12 months through January, the CPI increased 3.1%. That followed a 3.4% advance in December. Economists polled by Reuters had forecast the CPI gaining 0.2% on the month and rising 2.9% year-over-year. The annual increase in consumer prices has moderated from a peak of 9.1% in June 2022.

The BLS updated the seasonal factors, the model it uses to strip out seasonal fluctuations from the data. New weights, which saw the housing share rising and that of new and used cars lowered, were used to calculate the January CPI data.

That could partly explain the stronger-than-expected readings, which economists said were likely temporary.

Financial markets anticipate that the U.S. central bank will start cutting interest rates in May, though some economists are gravitating toward June, given the still tight labor market and persistently elevated services inflation. Policymakers have said they are in no hurry to start lowering borrowing costs and want convincing evidence that inflation is on a sustained slow path.

While significant progress has been made, risks remain, including the potential for renewed supply chain problems due to Red Sea shipping disruptions and drought in the Panama Canal. The inflation outlook, however, remains fairly favorable as the increase in rents is expected to moderate this year.

Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25% to 5.50% range.

Excluding the volatile food and energy components, the CPI rose 0.4% last month after increasing 0.3% in December. In addition to rents, beginning of the year price increases also likely accounted for the rise in the so-called core CPI.

The core CPI advanced 3.9% year-over-year in January, matching December's increase.

Though consumer prices remain elevated, measures tracked by the U.S. central bank for its 2% inflation target have improved considerably. The increase in the personal consumption expenditures (PCE) price index slowed to an annualized rate of 1.7% in the fourth quarter from a 2.6% pace in the July-September quarter. The core PCE price index rose at a 2% rate, unchanged from the third quarter.