Us consumer price inflation unexpectedly rose in January, and uncertainty about Federal Reserve policy surged

On February 12, 2025, according to detailed data released by the US Department of Labor, in January 2025, the CPI in the United States rose by 3.0% year-on-year. This is an acceleration from the 2.9% growth in December 2024. At the same time, from a month-on-month point of view, the CPI increased by 0.5% in January, which is also significantly higher than the market forecast of 0.3%. The rise is a blow to investors who had hoped for a steady fall in inflation.

More notably, excluding volatile food and energy prices from the CPI, core CPI remained at a high 3.3 per cent year-on-year and 0.4 per cent month-on-month, also beating market expectations of 0.3 per cent. As an important indicator of underlying inflation pressure, the firm performance of the core CPI undoubtedly further exacerbated the market's deep concern about the inflation situation in the United States.

The reaction of financial markets to the sudden data was swift and violent. After the release of the CPI data, the dollar index rose sharply in a short period of time, quickly breaking through the 108.40 mark, and a cumulative gain of 55 basis points. The move clearly reflects a significant increase in market expectations that the Federal Reserve is likely to maintain a high interest rate policy for some time to come. In the context of inflation pressure is still severe, the Fed is clearly not easy to make the decision to cut interest rates.

Meanwhile, the physical gold market has been hit hard. After the release of the data, the gold price fell by more than 1% in a short time, and even touched the position of $2,863.99 / ounce, and finally closed at $2,866.36 / ounce. The move underscores investors' sensitivity to a stronger dollar and the possibility that the Federal Reserve will keep monetary policy tight. Precious metals such as gold tend to be vulnerable to a beating against a backdrop of rising risk aversion.

Treasury yields also jumped after the data were released. The yield on the 10-year Treasury note rose 6.1 basis points to 4.602%. The move further reinforced market expectations that the Federal Reserve may continue to raise interest rates. With inflation pressures still stubborn, raising interest rates to curb inflation is undoubtedly one of the important options for the Fed.

This set of CPI data has undoubtedly had a profound impact on the direction of Fed policy. Before that, the Fed was widely expected to start considering rate cuts later in 2025. However, following the unexpected rebound in inflation data, traders have begun to adjust their rate cut expectations. But even so, the market is still uncertain about the future direction of the Fed's policy.

Anstey, a well-known analyst, pointed out after the release of the data: "The January CPI data is undoubtedly a negative signal for the Federal Reserve. It could lead to widespread speculation about whether the Fed will need to raise rates further in the future." Although Federal Reserve Chairman Powell has said in some public occasions recently that inflation has come down, the uncertainty of economic data is still large. The unexpected rise in CPI undoubtedly reinforces the market's deep concern that interest rates may continue to rise.

From a technical point of view, S&P 500 index futures also fell sharply after the data was released, with losses extending to as much as 1% at one point. The move underscores investors' heightened sensitivity to inflation data and the Fed's policy outlook. In the near term, market sentiment is likely to remain tense, especially as the Fed's path of interest rate hikes remains unclear.

Behind the strong performance of the US dollar and the fall in gold prices, in fact, reflects the market's expectations for a longer period of high interest rate environment. This expectation has led to a significant increase in risk aversion in equity markets. Investors are becoming more cautious with their assets and are actively seeking safer havens.

For the gold market, although it has been hit hard by upward pressure on the US dollar in the short term, its performance is still affected by the dual impact of inflation expectations and Fed policy in the medium and long term. If the Fed ultimately decides to leave the current high level of interest rates unchanged, then gold could continue to face downward pressure. Of course, whether the gold price can rebound in the short term depends on the market's further interpretation of the subsequent CPI data and the Fed's policy statement.

From a fundamental point of view, the higher than expected rise in US inflation may mean that the Fed will remain hawkish in future meetings and delay the possibility of rate cuts. With core inflation still firm, market expectations of a Fed rate cut could be eliminated altogether in the near term. There are even some market participants who have begun to bet on the possibility that the Fed may continue to raise rates in the future.

For commodity markets, especially commodities such as crude oil and gold, there may be a greater risk of volatility in the short term. The crude oil market in particular is affected by both the supply side and the demand side. In the coming months, the strong performance of the US dollar is likely to curb the upside of oil prices. At the same time, precious metals such as gold are also likely to continue to experience sharp fluctuations due to rising risk aversion and uncertainty about the Federal Reserve's policy.

The larger-than-expected rise in January's CPI undoubtedly adds more uncertainty to the Fed's policy path. Market expectations for rate cuts have changed significantly, with the dollar and US Treasury yields rising, while safe-haven assets such as gold are under pressure. In the coming months, investors will need to pay close attention to subsequent inflation data as well as the Fed's policy statement. Especially in the context of the increasing uncertainty of the global economic recovery, inflation remains one of the core concerns of the market. Investors should maintain a high degree of vigilance and adjust their investment strategies in a timely manner according to market changes to cope with various risks and challenges that may arise.