The unexpected rise in US inflation to 3% has put the Federal Reserve in an uncomfortable position, according to industry commentators.
The headline print for January, up from 2.9% in December, came in above consensus expectations of a hold.
Core inflation, which had been expected to dip to 3.1%, instead rose to 3.3%.
The unexpected rise comes after the Federal Reserve opted to hold interest rates last week, despite president Donald Trump calling for interest rate cuts.
“The bottom line is clear: the Fed should not be cutting,” said Dan Siluk, head of global short duration & liquidity and portfolio manager at Janus Henderson.
“No matter which way the Fed chooses to slice-and-dice the data – headline, core and supercore – they all came in higher than expectations. Both three month and six month annualised reads are also moving higher.
“While early year CPI reads are notorious for seasonality and distortions, the labour market is clearly stable and economic conditions don’t warrant easier conditions. All signs suggest that the neutral interest rate should be higher.”
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Seema Shah, chief global strategist at Principal Asset Management, added that the print will make for “very uncomfortable reading” for the Fed.
“The biggest monthly headline inflation increase since August 2023 will not be received well by policymakers or markets alike.
“Seasonality and one-off factors may have played some role in the upside surprise but, the combination of average earnings growth surprising to the upside last week, the supercore services inflation number moving sharply higher today, and the government’s policy agenda threatening to raise inflation expectations, is almost too convincing to dismiss.
“If this persists into the next few months, inflation risks may become too heavily weighted to the upside to permit the Fed to cut rates at all this year.”
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The main contributors to the print were higher energy and grocery prices.
Despite the unexpected inflation rise, Nicolas Sopel, head of macro research and chief strategist at Quintet Private Bank, says the US economy is in good health.
“The January inflation data justifies the current Fed’s pause. Markets adjusted now expecting only one 25 bps rate cut before end-2025. That said, expectations of monetary policy are notoriously volatile.
“Looking forward, we still think inflation will moderate but settle above the Fed’s 2% target. That should allow the Fed to cut modestly interest rates. For now, we think the inflation risks stemming from higher tariffs are overplayed. As the USD stays strong, it should mitigate the potential increases in import costs.
“Finally, the inflation print reflects the good health of the US economy. The Fed of Atlanta estimates that growth in the US is strong at just below 3% in the first quarter of 2025. This is a tailwind for equities and it’s one of the reasons we have a preference for US equities, while we remain cautious on US Treasuries.”