Overshadowed by news from the White House, the US inflation figures for January may worry the new administration.
The rate of consumer price inflation edged up to 3 per cent, from 2.9 per cent the previous month, containing some warning signs that the US Federal Reserve Board – the Fed- will struggle to get it down to its 2 per cent target. The headline was a further jump in the price of eggs – up more than 50 per cent year-on-year due to the outbreak of avian flu.
The news has implications for interest rates. At its last meeting, the Fed held rates steady, much to the ire of the president. And he won’t be happy that financial markets now believe there will be, at most, one more interest rate cut this year.
This should help to support the US dollar, particularly against the euro, with European Central Bank (ECB) rates expected to fall a few times more in 2025.
It may also affect Donald Trump’s plans to raise tariffs on imports into the US. As these act as a tax on imports, they are likely to push up prices for consumers, possibly quite significantly. As a president who campaigned on the basis of getting down inflation – and goaded the Democrats for not doing so – this is not good news.
A strong dollar might help a bit but would not offset the kind of tariff rises signalled by the president this week. If, of course, he goes ahead with them.
For now the financial markets seem to be betting that Trump will not go full steam ahead. Investors seem to be trying to look beyond the noise, reckoning that things won’t be too bad and that the Trump agenda will moderate as time goes on.
These appear to be brave assumptions on the evidence of this week. The inflation trend will be key in the months ahead. If it has not fallen by the time Trump’s tariffs are ready to go, what does he do then?
