Pound sterling drops as US inflation accelerates unexpectedly, Fed rate cuts in question

The pound sterling took a hit on Wednesday afternoon following the release of new data indicating an unexpected rapid acceleration in inflation within the world's largest economy.

The Bureau of Labor Statistics reported US inflation reached 3.0 per cent in January, a climb from 2.9 per cent, surpassing economists' forecasts, as reported by City AM.

The data revealed a 0.5 per cent price rise in January, the most substantial monthly increase since August 2023.

Moreover, core inflation, which omits volatile items like food and energy, ascended to 3.3 per cent from 3.2 per cent the previous month, again outstripping expectations.

"Indexes that increased over the month include motor vehicle insurance, recreation, used cars and trucks, medical care, communication, and airline fares," commented the Bureau.

These figures stand as a significant worry for the Federal Reserve, considering their ongoing alarm concerning the enduring nature of inflationary pressures.

In a recent address to Congress, Fed chair Jerome Powell remarked there was no "need to be in a hurry" to trim rates, even after last year's cut of the federal funds rate by 100 basis points.

Market analysts now foresee only a single rate cut this year, likely to occur in December. Post-release of these statistics, the dollar saw strength against the pound, with sterling dropping 0.5 per cent to $1.238.

Typically, higher US interest rates bolster the dollar, as traders can secure higher returns on investments.

Concerns are mounting among analysts that President Trump's fondness for tariffs could lead to increased inflation in the months ahead, potentially prompting the Federal Reserve to raise interest rates once more. "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," commented Jochen Stanzl, chief market analyst at CMC Markets.

Trump has already implemented tariffs on imports from China and introduced a new 25% tax on steel and aluminium imports. Further measures targeting the EU are anticipated to be unveiled later this week.