Inflation Remains Elevated, Casting Doubt on Fed Rate Cuts
Inflation in the United States unexpectedly rose to 3% in January, defying expectations and fueling speculation that the Federal Reserve may keep interest rates higher for longer. This unexpected increase casts doubt on the possibility of rate cuts in 2024, as previously anticipated by some analysts.
The data, released by the Bureau of Labor Statistics, showed inflation rising from 2.9% in December. Core inflation, which excludes volatile food and energy prices, also jumped to 0.4% in January from 0.2% in December, with annual core inflation rising to 3.3% from 3.2%.
These figures have led to growing skepticism among economists about the possibility of rate cuts this year. Fed Chair Jerome Powell has indicated that there is "no need to rush" into lowering borrowing costs, reinforcing this sentiment.
Financial markets reacted with volatility to the news. The S&P 500 fell 0.3%, while the Dow Jones Industrial Average slipped 0.5%. The Nasdaq, however, recovered to close marginally higher. The US dollar strengthened, while the pound fell against the greenback.
Economists now believe the Fed could hold interest rates steady for the rest of the year. They warn that Trump's protectionist policies, including tariffs on imports, could keep inflation high, constrain economic growth, and delay interest rate cuts.
Meanwhile, inflation in the UK is expected to peak at 3.7% this summer, up from its current 2.5%. 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.