January’s inflation report exceeded expectations, sending shockwaves through global markets. The US Consumer Price Index (CPI) rose by 3% year-over-year, surpassing economists’ forecasts of 2.9%. This marked the third consecutive increase in annual inflation, signaling a potential reversal of the disinflation trend seen in 2023. The US inflation impact is becoming increasingly evident.
In addition, the monthly CPI rose by 0.5%, well above the anticipated 0.3%. This marked the sharpest monthly increase since August 2023, with fuel oil and food prices contributing heavily to the rise. Energy prices surged, with fuel oil up 6.2% and eggs soaring by 15.2%.
Market Reactions: Strong Dollar and Declining Euro
The inflation surprise reshaped market expectations for Federal Reserve policy. Investors are now pricing in just one rate cut by the Fed in December 2025, compared to previous expectations of a cut in September 2025. This shift caused the US dollar to strengthen, while the euro fell by 0.3%, trading at $1.0330.
Treasury yields surged as well, with the 10-year yield climbing 12 basis points to 4.66%. European sovereign bond yields also spiked, with German Bund yields rising to 2.48%. Stock markets were also impacted. The S&P 500 opened lower, down by 0.8%, as investor sentiment shifted.
Fed Faces Criticism Over Monetary Policy
Federal Reserve Chair Jerome Powell acknowledged the persistent inflation but maintained that the central bank was in no rush to adjust policy. Powell’s comments come amid growing scrutiny from analysts. Some, like Andrea Lisi and Mohamed El-Erian, argue that the Fed’s monetary policy has not been restrictive enough. They contend that recent rate cuts may have contributed to inflationary pressures instead of easing them.
Despite the concerns, Robin Brooks, former chief economist at the Institute of International Finance, downplayed the significance of the report. He attributed the higher-than-expected inflation to seasonal factors and stressed that core services inflation, a key indicator, remains stable.
US Market and Global Outlook
The surprise inflation data also sparked political reactions. US President Donald Trump, ahead of the report’s release, called for lower interest rates to boost the economy. His comments, timed with the release, sparked debate about the role of monetary policy in shaping the economy.
As the Federal Reserve navigates policy decisions in the coming months, the markets will closely monitor further inflation data and its impact on global financial markets.
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