Inflation in the United States rose unexpectedly to 3% in January, fuelling speculation that the Federal Reserve may keep interest rates higher for longer.
Data from the Bureau of Labour Statistics showed inflation increasing from 2.9% the previous month, defying analysts’ expectations that it would remain unchanged. On a monthly basis, prices rose by 0.5%, up from 0.4% in December. Core inflation, which the Fed closely monitors, also jumped to 0.4% in January from 0.2% in December, with annual core inflation rising to 3.3% from 3.2%.
The figures cast fresh doubt on whether the Fed will cut interest rates in 2024. Fed chair Jerome Powell told the Senate banking committee that there was “no need to rush” into lowering borrowing costs, reinforcing growing scepticism among economists.
The central bank left its key interest rate on hold at 4.25% to 4.5% in January, having cut it by a percentage point last year. President Donald Trump has repeatedly called for rate reductions, arguing that lower borrowing costs would complement his latest wave of tariffs on imports. However, Powell has resisted political pressure, with analysts suggesting that inflationary risks, exacerbated by Trump’s trade policies, could keep rates elevated.
Financial markets reacted with volatility. The S&P 500 fell 0.3% to 6,051.97, while the Dow Jones Industrial Average slipped 0.5% to 44,368.56. The Nasdaq, which had been down nearly 1%, recovered to close marginally higher at 19,649.95. The US dollar strengthened on the news, with the dollar index rising 0.32%, while the pound fell 0.34% against the greenback to $1.240.
Bond markets also saw a reaction, with the yield on the benchmark 10-year US Treasury note climbing 11 basis points to 4.651%. UK gilts followed suit, with the yield on 10-year government bonds increasing by 6 basis points to 4.567%.
Economists believe the Fed could now hold interest rates steady for the rest of the year. Paul Ashworth, chief North America economist at Capital Economics, said: “With tariffs likely to keep core inflation at or above 3% in 2024, the Fed will stand pat for at least the next 12 months.” Fund manager Janus Henderson echoed this sentiment, stating: “The bottom line is clear: the Fed should not be cutting.”
Since returning to office, Trump has introduced a 10% tariff on Chinese imports, announced but then postponed a 25% levy on Canadian and Mexican goods, and confirmed that a 25% tariff on imported steel and aluminium will take effect in March. Economists warn that these protectionist policies could keep inflation high, constrain economic growth, and delay interest rate cuts—despite Trump’s campaign pledge to reduce the cost of living.
Meanwhile, inflation in the UK is expected to peak at 3.7% this summer, up from its current 2.5%, according to the Bank of England. The eurozone’s inflation rate has also edged up to 2.5%. However, both the Bank of England and the European Central Bank are still expected to pursue gradual rate cuts this year.
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US inflation climbs to 3%, raising doubts over Federal Reserve rate cuts
