Rate cuts put on ice as consumer inflation surges to a 9-month high

The consumer price index increased 3% in January from a year ago, Wednesday’s report from the Labor Department showed, up from 2.9% the previous month. It has increased from a three-and-a-half year low of 2.4% in September.

The figures show that inflation has remained stubbornly above the Fed’s 2% target for roughly the past six months, after it fell steadily for about a year and a half.

“The increase in inflation metrics completely takes away the ability of the Fed to cut rates,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in an email.

Elevated prices created a major political hurdle for former President Joe Biden. President Donald Trump pledged to reduce prices in last year’s campaign, though most economists worry that his many proposed tariffs could at least temporarily increase costs.

The unexpected boost in inflation could dampen some of the business enthusiasm that arose after Trump’s election on promises to reduce regulation and cut taxes. Dow futures tumbled 400 points and all major markets are likely to sell off at the opening bell. Bond yields rose, a sign traders expect inflation and interest rates to remain high.

No progress on inflation

“We’re really not making progress on inflation right now,” Sarah House, senior economist at Wells Fargo. “This just extends the Fed’s hold.”

Inflation often jumps in January as many companies raise their prices at the beginning of the year, though the government’s seasonal adjustment process is supposed to filter out those effects.

Yet House said inflation’s stubbornness wasn’t just a one-month blip. Consumers — particularly wealthier ones — are still spending at a robust pace, giving many companies less reason to hold down prices. And much of the decline in inflation in 2023 and early last year stemmed from supply-chain improvements, but that trend has mostly played out.

Excluding the volatile food and energy categories, core consumer prices rose 3.3% in January compared with a year ago, up from 3.2% in December. Economists closely watch core prices because they can provide a better read of inflation’s future path.

“The surprise to the upside on January’s inflation numbers could complicate the Fed’s plan moving forward,” Elizabeth Renter, senior economist at NerdWallet, said in a note. “If signals of ongoing inflationary pressure continue, particularly in the midst of potentially inflationary policies, a rate hike wouldn’t be completely out of the question this year, and further cuts less likely anytime soon.”

Inflation also worsened on a monthly basis, with prices jumping 0.5% in January from December, the largest increase since August 2023. Core prices climbed 0.4% last month, the most since March 2024.

Grocery prices climbed 0.5% just in January, pushed higher by a 15.2% surge in egg prices, the biggest monthly increase since June of 2015. Egg prices have soared 53% compared with a year ago.

An avian flu epidemic has forced many egg producers to cull millions of birds from their flocks. Some stores have imposed limits on egg purchases, and some restaurants have placed surcharges on egg dishes.

The cost of car insurance continues to rise, and picked up 2% just from December to January. Hotel prices rose 1.4% last month, while the cost of a gallon of gas moved up 1.8%.

Later Wednesday, Federal Reserve Chair Jerome Powell will testify before the House Financial Services Committee, where he will likely be asked about inflation and the Fed’s response to it. The Fed raised its benchmark rate in 2022 and 2023 to a two-decade high of 5.3% to combat inflation. With inflation down significantly from its 9.1% peak in June 2022, it cut its rate to about 4.3% in its final three meetings last year.

The Fed’s rate typically influences other borrowing costs for things like mortgages, auto loans, and credit cards.

Early Wednesday, Trump said on social media that interest rates should be lowered, “something which would go hand in hand with upcoming Tariffs!!!” Yet the tick up in consumer prices makes it less likely the Fed will cut rates anytime soon.

‘A stew of uncertainty’

One sign of concern for economists is that goods prices, excluding food and energy, rose 0.3% in January from the previous month. Prices for goods such as cars, furniture, and appliances had been flat or falling after supply-chain kinks stemming from the pandemic were resolved. Yet now goods prices have ticked up even before widespread tariffs have been put into effect.

Trump has imposed 25% tariffs on steel and aluminum, which could push the cost of cars, appliances, and industrial machinery higher. He also said earlier this week he would impose “reciprocal tariffs” on countries that have high duties on U.S. goods.

“There’s just a stew of uncertainty that if it lasts and lingers over the next couple months, you could see business confidence come down,” Anthony Saglimbene, chief market strategist at Ameriprise, said. That could reduce hiring and investment, he said.

Inflation’s recent uptick is a major reason the Federal Reserve has paused its interest rate cuts, after implementing three of them last year. On Tuesday, Fed Chair Jerome Powell said “we do not need to be in a hurry” to implement further reductions in testimony to the Senate Banking Committee.

Economists at Goldman Sachs forecast that yearly core inflation would fall almost a full percentage point, to 2.3%, by the end of this year, absent any import duties. But they expect tariffs will raise end-of-year inflation to 2.8%.

On Tuesday, Fed Chair Powell acknowledged that higher tariffs could lift inflation and limit the central bank’s ability to cut rates, calling it “a possible outcome.”

But he emphasized that it would depend on how many imports are hit with tariffs and for how long.

“In some cases it doesn’t reach the consumer much, and in some cases it does,” Powell said. “And it really does depend on facts that we we haven’t seen yet.”