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CPI Data Stir US-UK Markets

Stavros Tousios | Wednesday 14 February 2024

US stocks declined notably on Tuesday, February 13, as the market adjusted expectations around the Fed’s interest rate cuts timing following higher-than-forecasted CPI data. 

The Dow Jones Industrial Average (USD 30) fell 1.4%, representing the largest single-day drop since March 23, 2023, and the S&P 500 (US 500) equally lost 1.4%. Meanwhile, the tech-heavy Nasdaq (US-TECH 100) finished the day down 1.80%. After the release of the inflation data, markets priced in only a 50% probability of a rate cut in May, down from 95% a couple of weeks back.

Across the Atlantic, UK CPI inflation came in slightly lower than expected on Wednesday,  February 14, increasing the chances of BOE (Bank of England) acting ahead of the US’s central bank

The weaker inflation data offered some relief to policymakers, sending the British pound lower against both the euro (EURGBP) but also against the dollar (GBPUSD). Cable traded higher on Tuesday owing to the UK’s strong job report. After Wednesday's Release, some policymakers suggested that rate cuts could come sooner, with the market pricing in a 72% probability of a June rate cut.

Consumer price index CPI

US CPI Pushes Back Fed Rate Cut Expectations

CPI inflation appreciated more than expected in January, increasing 0.3% month-on-month and 3.1% year-on-year, above economists’ expectations of 2.9%. When excluding food and energy costs, core inflation also rose 3.9% year-over-year, the highest since May 2023, signalling inflation pressures remain. The expansion in the CPI in January was tied to higher rent and housing costs. Shelter inflation was disappointing, with prices advancing 6% year-on-year.

In addition, services inflation revealed little signs of easing, with prices excluding energy up 0.7% in January, the highest since September 2022. However, businesses were able to pass on increasing costs to consumers. While real hourly earnings (a component of the NFP report) increased when adjusted for inflation, weekly earnings fell 0.1% over the year due to shorter work weeks. This keeps consumers on their toes about inflation despite the stock market continuing to gain.

The higher-than-expected inflation reading dissatisfied investors hoping for earlier monetary policy changes. Some Fed officials had already warned of more evidence that inflation can slow towards the 2% target before even considering rate cuts. Just before the CPI release, Atlanta Fed President Raphael Bostic revealed that rate cuts were unlikely until the summer, expecting inflation at around 2% by the end of 2024. Overall, policymakers expect three rate cuts this year, but Bostic sees cuts happening later than mid-year. 

Following the CPI release, some analysts contemplate scenarios where the Fed may not cut rates at all this year. A more extreme scenario sees a number of economists going as far as to believe that inflation may prove resilient enough to allow the Fed to keep rates higher for longer than markets expect. (Source: Market Watch)

UK CPI Miss Brings BOE Cut Projections Forward

Across the continent, UK inflation flattened out at 4% in January, defying forecasts of an increase due to a monthly fall in food prices offsetting rising energy bills. This was slower than economists had expected, as they had forecasted a slight bump to 4.2%.

In particular, month-on-month inflation fell to -0.6%. UK’s core inflation also held steady at 5.1% year-on-year but slightly below estimates of 5.2%. The softer-than-expected inflation reading suggests inflation pressures are easing in the UK and could allow the BOE to cut rates. Bets of rate cuts during 2024 increased after the release.

While UK inflation has eased from its peak, prices for essential goods and services remain high, putting pressure on households. Food prices have increased by 25% over the past two years, more than double the rate of the previous decade. 

Also, service inflation, a better measure of domestic price pressures, rose slightly to 6.5% despite coming in below forecasts. 

Rising services inflation along with strong wage growth reported recently, remain a concern for the BOE. While wage growth slowed in December, real wages grew by 1.4% when adjusted for inflation.

Forward Expectations for the US and UK

The U.S. economy continues to grow strongly despite the high interest rate environment, with strong job and business activity growth but high inflation. 

As the Fed has revealed on several occasions, interest rates are coming down at some point in 2024, but recent data give the Fed the flexibility to wait for convincing inflation numbers. 

On that front, household debt is high, but income has risen more, meaning Americans are now less leveraged. Although some argue higher rates hurt affordability and growth, incoming data shows consumers are still spending. All the while, the housing market has remained resilient, and credit card balances and delinquencies are also not yet at concerning levels. 

Still, Fed Chair Jerome Powell remains cautious about easing interest rates too soon, likely because he wants to avoid the stop-and-go inflation of the 1970s. As inflation has yet to reaccelerate, it has not fallen back enough for the Fed to cut rates. So, its current less hawkish stance on rate cuts may just be prudent, given the broader economics.

On the other hand, the  BOE and its Finance Minister, Jeremy Hunt, believe that UK inflation will fall to around 2% in the coming months due to energy bills and food costs expected to drop. While core and services inflation remains high, slowing wage growth and weaker economic activity are expected to push inflation lower this year. 

The latest figures suggest the UK may be close to winning its fight against soaring inflation, with energy bill cuts due in April likely to support the narrative. However, potential tax cuts in the upcoming budget could keep rates higher for longer. At the end of the day. inflation at 4% is a reminder that the cost of living crisis in the UK may not be over just yet.


Recent inflation data in both the US and the UK are changing monetary policy expectations. Expectations are pushed back in the US, whereas in the UK, they fuel bets of earlier interest rate cuts. As we advance, the Fed will remain cautious about cutting too soon as economic data shows the US economy remains resilient. Although BOE expects to see drops in energy bills and food costs, potential tax cuts in the upcoming budget could keep rates higher for longer. As 2024 continues to unfold, the markets will keenly watch central banks’ contrasting approaches and their implications.

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