US inflation surged unexpectedly in January, unsettling markets and pushing back expectations for Federal Reserve interest rate cuts until December 2025. The euro dropped, US Treasury yields soared, and European stocks erased earlier gains. Analysts warn that inflation remains persistent, leading to uncertainty around future policy moves.
The US saw inflation exceed forecasts in January, with the Consumer Price Index (CPI) rising 3% year-on-year, a 0.1 percentage point increase from December and above the expected 2.9%. This marked the third consecutive rise in annual inflation, suggesting that the disinflationary trend might be stalling or reversing.
The CPI also rose 0.5% month-over-month, far outpacing the 0.3% estimate, and marking the fastest monthly increase since August 2023. Energy prices and food costs spiked, with fuel oil rising 6.2% and egg prices climbing 15.2%. Core inflation, excluding volatile items like food and energy, increased by 3.3% year-over-year, slightly above December’s 3.2% and surpassing expectations.
Federal Reserve Chair Jerome Powell acknowledged inflation remains “somewhat elevated” during his report to the US Congress but emphasized that policymakers were not rushing to change their approach.
The unexpected inflation data sent shockwaves through global markets. Traders now expect a single Fed rate cut in 2025, postponed until December, with the next cut unlikely until September 2026.
The US dollar strengthened as investors adjusted for prolonged high rates, while the euro dropped 0.3% to $1.0330, losing the previous day’s gains. US Treasury yields surged, with 10-year yields rising to 4.66%, dragging up European sovereign bond yields.
On Wall Street, the S&P 500 opened lower, down 0.8%, while European equities pared earlier gains. The Euro STOXX 50 remained steady at a record high of 5,390 points. Spain’s IBEX 35 was an exception, climbing 1%.
Among the best-performing stocks in the eurozone, Kering gained 7% after strong earnings, Anheuser-Busch rose 3% on better sales forecasts, and Deutsche Bank added 2.6% following an upbeat outlook.
Conversely, Koninklijke Ahold Delhaize NV dropped 5.5%, RWE fell 1.9% amid lower energy prices, and L’Oréal slipped 1.6%, despite strong consumer demand.
