The data released yesterday showed that U.S. inflation increased more than expected in the first month of the year. The Consumer Price Index (CPI) for all items rose by 0.5% in January, significantly exceeding economists' median forecast of 0.3%—marking the largest monthly increase since August 2023. Over the past twelve months, the all-items index increased by 3%.

The shelter index rose by 0.4% in January, accounting for 30% of the monthly increase in the all-items index. Over the past twelve months, shelter costs increased by 4.4%, the smallest annual rise since January 2022. The gasoline index climbed by 1.8% in January, while the energy index increased by 1.1% during the month. Meanwhile, the food index rose by 0.4% monthly and 2.5% annually.

The so-called core CPI, which excludes volatile food and energy costs, rose by 0.4% in January after a 0.2% increase in the previous month, bringing the annual increase to 3.3%.

The services index increased by 0.5% in January, with an annual rise of 4.3%. Over the past year, the most notable increases came from motor vehicle insurance (+11.8%), medical care (+2.6%), education (+3.8%), and recreation (+1.6%).

One of the key contributors to the rise in price pressures in January was grocery prices. Two-thirds of the increase in grocery prices stemmed from a surge in egg prices---up more than 15%---following an outbreak of avian flu. Hotel accommodation and used car costs also increased, likely reflecting the impact of wildfires in Los Angeles.

The January report also included an adjustment to the weighting of items in the consumer basket to better capture American households' spending habits. However, the revision was minimal. Similarly, seasonal adjustments were also minimal and failed to offset the early-year price increases.

Following the report, U.S. stocks initially dropped but later recovered some of their losses. U.S. Treasury yields rose across all maturities, with the benchmark 10-year yield climbing as high as 4.64% before retreating to around 4.60%. Meanwhile, the U.S. dollar strengthened against other currencies but later gave up all its gains.

At first glance, the rise in January figures heightened inflation concerns. The data came after several market observers, including a former Treasury Secretary, suggested that the Federal Reserve's next move might be a rate hike rather than a cut, fueling further speculation. However, some economists disagree.

Price increases tend to be higher in January, as many firms choose the first month of the year to adjust their prices and wages. Following the report, some analysts argued that a large portion of the inflation spike was driven by this seasonal factor and was unlikely to lead to recurring price increases.

While acknowledging the presence of this temporary factor, it remains difficult to distinguish how much of the price pressures stem from one-time price adjustments versus structural factors. Therefore, while it would be premature to conclude that inflation in the U.S. is on the rise again based on a single report, this data does provide additional evidence that progress toward the target rate has stalled.

Given that the economy continues to perform well and the labor market remains strong, the Fed is likely to hold rates steady for the foreseeable future amid upside risks to inflation—especially as President Donald Trump's tariff, tax, and immigration policies contribute to rising inflation expectations and heightened uncertainty.

Indeed, on the second day of his testimony on Wednesday, Fed Chair Jerome Powell indicated that the central bank would remain on hold. Powell stated that the inflation data showed significant progress in bringing inflation under control but also highlighted that more work remains to be done.

Swap traders have now pushed back their expectations for the Fed's first rate cut to December, pricing in only a single quarter-point reduction this year. Before the CPI report, they had been leaning toward two rate cuts, with the first one expected in September.

Amid uncertainty, markets are seeking more guidance on the global economic outlook. Growing confidence that the Fed will remain on hold should keep the U.S. dollar strong while pressuring other currencies. However, a clearer directional call will depend on more clarity around Trump's policies and incoming U.S. data, which will continue to shape sentiment.

The prevailing uncertainty could lead to a strong but volatile dollar, while precious metals—particularly gold—are likely to continue benefiting from this environment.

Later in the day, markets will be watching the producer inflation report. Since the Producer Price Index (PPI) includes components that contribute to the Fed's preferred inflation gauge, it holds the potential to shape expectations regarding the Fed's policy path.