Feb 12, 2025 - US inflation just threw a wrench into Wall Street's rate-cut dreams. The January consumer price index (CPI) surged 0.5%—the biggest jump since August 2023—while core CPI, stripping out food and energy, climbed 0.4%, outpacing forecasts. Higher grocery and gas prices were expected, but it was soaring car insurance, airfares, and prescription drug costs that blindsided economists. While some argue this is just the usual “January effect” of early-year price hikes, the data shows inflation isn't backing down anytime soon. On top of that, the Trump administration's push for tariffs is stoking fears of further price pressures, keeping Fed policymakers in a tight spot.

Markets didn't take the news well. The S&P 500 tumbled 0.7% as of 11.35am, as traders slashed bets on multiple Fed rate cuts this year, while Treasury yields jumped and the dollar strengthened. Interest rate swaps now point to just one cut in 2024, a major shift from earlier expectations. Fed Chair Jerome Powell, testifying before Congress, made it clear: the central bank is in no rush to cut rates. Trump, on the other hand, renewed his push for lower rates but blamed the inflation spike on the Biden administration.

With inflation heating up and core services jumping 0.8%, the Fed's fight against rising prices isn't over. The bond market's reaction signals investors are preparing for higher-for-longer rates, which could keep pressure on equities. All eyes are now on upcoming data, like the producer price index, which could either confirm this inflationary trend—or give investors some much-needed relief.