US inflation unexpectedly increased to 3 per cent in January, bolstering the case for the Federal Reserve to proceed slowly with interest rate cuts and hitting stocks and government bonds.
Wednesday’s figure from the Bureau of Labor Statistics surpassed the expectations of economists polled by Reuters, who predicted that inflation would hold steady at December’s 2.9 per cent.
The month-on-month increase for January was also ahead of expectations, at 0.5 per cent compared with a predicted 0.3 per cent.
The figures led investors to bet that the Fed would cut interest rates just once this year. Before the publication of the inflation data, the futures market had expected the first cut to arrive by September, with a 40 per cent chance of a second reduction by the end of the year.
“Markets are not convinced that we will see disinflation later in the year, and today’s data certainly don’t give evidence of that,” said Eric Winograd, chief economist at AllianceBernstein, who highlighted concerns that “if inflation doesn’t keep going down, the Fed won’t cut rates at all”.
After the data was published, the two-year yield on US Treasury bonds, which tracks interest rate expectations and moves inversely to price, jumped 0.09 percentage points to 4.37 per cent.
Futures contracts tracking the S&P 500 share index fell 1 per cent, while those tracking the tech-heavy Nasdaq 100 declined 1.1 per cent. A gauge of the dollar against six other currencies jumped 0.5 per cent.
The inflation data comes after the Fed defied calls from President Donald Trump to make steep cuts to borrowing costs and instead held its main rate at 4.25 per cent to 4.5 per cent.
On Tuesday, Fed chair Jay Powell told Congress the central bank would continue “doing our job and stay out of politics”.
But on Wednesday Trump renewed his demands on his Truth Social platform. “Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!” the US president posted. “Lets Rock and Roll, America!!!”
Wednesday’s data will fuel concerns among economists that the world’s largest economy is heating up again, as Trump moves ahead with plans for sweeping tariffs, a crackdown on immigration, and broad tax cuts that many economists fear could trigger a new rise in inflation.
Since returning to the White House on January 20, Trump has already started implementing mass deportations of undocumented immigrants, and imposed 10 per cent tariffs on Chinese imports.
He has also announced that high levies on nearly all imports from Canada and Mexico, as well as on all steel and aluminium imports, would take effect in March.
Powell has said it is still too early to judge the impact of the tariffs on the economy and monetary policy, because this would depend on the details of the levies.
Whitney Watson at Goldman Sachs Asset Management said that, together with the robust state of the US jobs market, Wednesday’s inflation figures were likely to reinforce the Fed’s “cautious approach to easing”. She added: “We think the Fed is likely to remain in ‘wait-and-see mode’ for the time being.”