Data released this morning from the Bureau of Labor Statistics shows US consumer prices rose 0.4% month-on-month in February, pushing the annual inflation rate to 3.2%. This marks the second consecutive acceleration, dashing hopes that the Federal Reserve had tamed the beast. The core CPI, which strips out volatile food and energy, also rose 0.4%, with shelter and services costs remaining stubbornly high. Market reaction was swift: the S&P 500 shed 1.5% in early trading, the dollar strengthened, and bond yields lurched upwards. The 10-year Treasury yield hit 4.3%, while the 2-year, more sensitive to monetary policy, breached 4.7%.
But the truly alarming headline came not from the data release but from the White House. President Donald Trump, in an interview with Fox Business, stated that 'a little bit of inflation is good for the economy' and welcomed the rising prices as a sign of 'tremendous success' of his tariff policies. This is, to put it mildly, economic heresy. Central banks exist to preserve price stability; no serious finance minister welcomes inflation. Trump's comments undermine the very credibility the Fed has been fighting to restore after the post-pandemic price shock.
For the City of London, this is a double blow. First, the inflationary data itself tightens global financial conditions. Higher US yields suck capital out of emerging markets and, crucially, out of the UK as well. The pound has already weakened 1% against the dollar this morning. That feeds directly into UK inflation via imported goods, making life harder for the Bank of England. Second, Trump's rhetoric signals that the world's largest economy is pursuing an increasingly erratic fiscal policy. Markets hate uncertainty; the premium for holding US assets has just risen.
Let's look at the mechanics. The Fed now faces a nightmare. If it holds rates steady, inflation remains embedded. If it hikes, it risks choking the real economy. The bond market is already pricing in no cuts before 2025. My concern is that the 'bond vigilantes' are regathering. If the market decides the US fiscal trajectory is unsustainable, we could see a disorderly sell-off. That would be 2022 all over again, with cascading losses across asset classes.
The irony is that Trump is supposed to be a businessman president. No businessman celebrates rising input costs. But his base loves it, and that's what matters to him in an election year. The rest of us, however, must prepare for a period of stagflationary pressures: weaker growth, higher prices, and more volatile markets. The BoE will be watching, and I suspect we'll hear some cautious noises from Threadneedle Street shortly. For now, my advice to investors is simple: shorten duration and hold cash. This storm has not yet peaked.
