Pound sterling slumped on Wednesday afternoon after new data showed a surprisingly fast acceleration in price pressures in the world’s largest economy.
Figures from the Bureau of Labor Statistics showed that US inflation came in at 3.0 per cent in January, up from 2.9 per cent and ahead of economists’ expectations.
The report showed that prices rose 0.5 per cent in January, the largest monthly increase since August 2023.
Core inflation, which strips out volatile components like food and energy, rose to 3.3 per cent, up from 3.2 per cent the month before and also ahead of expectations.
“Indexes that increased over the month include motor vehicle insurance, recreation, used cars and trucks, medical care, communication, and airline fares,” the Bureau said.
The figures will be a major cause for concern for the Fed given their continued concerns about the persistence of inflationary pressures.
Speaking in Congress yesterday, Fed chair Jerome Powell said there was no “need to be in a hurry” to cut rates again, having reduced the federal funds rate by 100 basis points last year.
Markets now expect just one rate cut this year, which is anticipated to take place in December.
The dollar strengthened against the pound following the figures, with sterling falling 0.5 per cent to $1.238. Higher US interest rates tends to boost the dollar as traders can earn a greater return on their investment.
Many analysts also worry that Trump’s penchant for tariffs will force up inflation in the coming months, which might even force the Fed to hike rates again.
“What makes today’s rise in CPI inflation data so precarious is that many believe this is just the beginning, as tariffs could push inflation even higher,” Jochen Stanzl, chief market analyst at CMC Markets, said.
Trump has already imposed tariffs on goods coming from China as well as a new 25 per cent levy on steel and aluminium imports. He is expected to announce new measures aimed at the EU later this week.
Tariffs make it more expensive to import goods from abroad, which typically feeds through into higher prices for consumers as firms try and maintain their margins.
Richard Flynn, managing director at Charles Schwab UK, said tariffs put the Fed in a “tough place” because they can “create joblessness but also be inflationary”.