US inflation rose more than expected in January, shaking markets and pushing Fed rate cut expectations to December 2025. The euro fell, US Treasury yields jumped, and European stocks erased gains. Analysts warn inflation remains sticky, sparking policy uncertainty.
A higher-than-expected January inflation reading in the United States rattled financial markets on Wednesday, prompting investors to reassess their expectations for Federal Reserve interest rate cuts.
The headline Consumer Price Index (CPI) rose 3% year-over-year in January, up 0.1 percentage points from December and above economists’ forecasts of 2.9%.
This marked the third consecutive increase in the US annual inflation rate, suggesting that the disinflationary trend may have stalled or even already reversed.
Price pressures were particularly evident in the monthly reading, with the CPI climbing 0.5% from December, exceeding estimates of 0.3% and marking the fastest monthly rise since August 2023.
While energy and food costs surged, with fuel oil up 6.2% and eggs soaring 15.2% on the month, inflation remained sticky in core components as well.
Core inflation, which excludes volatile food and energy prices, rose 3.3% year-over-year, slightly higher than December’s 3.2% and exceeding the expected 3.3%. On a monthly basis, core CPI accelerated by 0.4%, surpassing the 0.3% forecast.
Federal Reserve Chair Jerome Powell acknowledged on Wednesday that inflation remains “somewhat elevated” while delivering the Fed’s Semiannual Monetary Policy Report to the US Congress.
He stressed that policymakers are in no rush to alter the current stance.
Hot inflation sparks expert reactions
Market participants and economists quickly reacted to the data, questioning the Federal Reserve’s policy stance.
Andrea Lisi, CFA, a macro analyst, noted: “Since October 2024, I have consistently argued that, contrary to the Federal Reserve’s view that monetary policy is restrictive, it remains quite accommodative. The 100 basis points of rate cuts in late 2024 have arguably fueled inflation rather than curbed it.”
Renowned economist Mohamed El-Erian added: “If the Fed were truly committed to its 2% inflation target, market participants would be discussing a potential rate hike—not just a longer pause in the cutting cycle.”
Robin Brooks, former chief economist at the Institute of International Finance and senior fellow at the Brookings Institution, cautioned against overreacting to the data:
“Ever since COVID, January inflation has come in ‘hot.’ Today’s core CPI is no different. My best proxy for underlying inflation is ‘core’ services, and that looks well-behaved. This ‘hot’ reading is largely about noise and residual seasonality, as in 2023 and 2024.”
US President Donald Trump posted on Truth Social prior to the inflation report’s release, urging the Federal Reserve to lower interest rates and indicating that this policy will move “hand-in-hand” with higher tariffs.
The timing of his statement drew criticism, as Spencer Hakimian, founder of Tolou Capital Management, remarked: “The most ridiculous part of this post is that the president receives the CPI report the night before its release. Trump had this data all of last night and this morning, yet still decided to post this nonsense at 7:50 AM.”
Markets react: Stocks fall as dollar, Treasury yields rise
The inflation shock rippled through global markets, reshaping expectations for Federal Reserve policy. Traders now anticipate only one Fed rate cut in 2025, delaying it to December instead of September.
A second cut is not expected before September 2026, reflecting a sharp shift in interest rate forecasts.
The US dollar strengthened as investors priced in a prolonged period of elevated rates, while the euro declined 0.3% to $1.0330, trimming its previous day’s gains.
US Treasury yields surged, with 10-year yields rising 12 basis points to 4.66%, pushing European sovereign bond yields higher.
German Bund yields climbed 5 basis points to 2.48%.
Wall Street opened lower, with the S&P 500 down 0.8% as of 4:20 p.m. Central European Time.
European equities pared gains, with the Euro STOXX 50 holding steady at a record-high 5,390 points, while Spain’s IBEX 35 outperformed for the session, rising 1%.
Among the strongest performers within large-cap eurozone equities, Kering jumped 7% following strong earnings, Anheuser-Busch gained 3% on improved sales forecasts, and Deutsche Bank rose 2.6% after issuing an upbeat outlook.
On the downside, Koninklijke Ahold Delhaize NV led losses with a 5.5% decline, RWE dropped 1.9% amid weaker energy prices, and L’Oréal slipped 1.6% despite sustained consumer demand.
