Macro and Market Trends February 2025: US Fed set to hold steady as Bank of England battles higher inflation

The US non-farm payroll (NFP) rose by 143,000 in January according to the US Bureau of Labour Statistics (BLS) but was below the market expectation of 170,000. It follows a rise in 307,000 NFPs recorded in December.

Jobs are still being created as firms continue to replace workers that left the workforce during the Covid pandemic. US demand for workers is still running around 200,000 higher than the available supply.

On top of rehiring workers post-Covid, immigration has been another source of growth in the labour market. However, with the crackdown on immigration under Trumps’ second administration, this could soon become less of a driver for economic growth. Offsetting the impact of lower immigration on employment are President Donald Trump’s central economic policies which include deregulation and tax cuts.

One risk for markets is that a sharp rise in unemployment leads to a stalling economy and a recession. However, that risk appears to be contained. Overall, employment is growing sufficiently to support consumer demand and economic growth.

US January annual headline Consumer Prices Index (CPI) inflation came in at 3% up from 2.9% in December. On a monthly basis, headline CPI rose 0.5% in January, versus 0.4% in December.

The core rate of inflation, which excludes foods and energy, was 3.3% versus 3.2% in December. On a monthly basis, core CPI rose 0.4% in January, versus a 0.2% gain in December.

January’s data showed that December’s expected increase was merely delayed rather than written off and represents the strongest month-on-month inflation rise since August 2023.

Inflation has been driven by food prices and volatility in energy prices. However, with President Trump vowing to lower energy prices (especially gas) for American households, we could start seeing some disinflation from this sector if these policies are implemented.

It was similarly disappointing news with core inflation which had the strongest monthly rise in nearly a year, pushing the annual rate up to 3.3%. The drivers were used car prices (rising 2.2% in January) and transportation services (up by 1.8% in January) with the latter remaining a particularly sticky component running at an annual rate of 8.1%. However, clothing prices fell by 1.4%, which helped mitigate the impact of other inflationary sectors.

US 10-year treasury yields ticked up 10 basis points following the CPI data (yields move inversely to prices) while US equity futures were off ~1%.

This persistency in inflation, coupled with the US’s resilient growth outlook and the likely expansionary fiscal and geopolitical policies means that the Federal Reserve (Fed) has little reason to cut interest rates soon. Following the CPI print, investors reduced the magnitude of expected Fed cuts for this year, now just one is predicted for later this year.

The UK continues to face stickier inflationary pressures compared with other advanced economies. This is arguably reflected in the bond market with gilts yields remaining considerably higher than their European counterparts, despite the UK facing a similarly weak growth profile.  

UK annual headline CPI inflation for January was 3%, higher than December’s reading of 2.5%. In monthly terms, CPI was down 0.1%, compared to a rise of 0.3% in December. Core inflation (excluding food, energy, alcohol, and tobacco) was 3.7%, which was above the prior reading of 3.2%.  

Both the headline and core CPI measures increased this month, driven higher by transport, food, non-alcoholic beverages, and education as VAT on private schools appeared in the inflation data for the first time. Prices also increased in the recreation sector, possibly driven by companies preparing for the rise in National Insurance contributions. Services inflation, meanwhile, rose from 4.4% to 5%. 

January’s CPI inflation was higher than expected and this complicates the Bank of England’s (BoEs) job. Last week’s gross domestic product (GDP) data showed that the UK economy is barely growing while the BoE expects higher inflation on the back of higher global energy prices. This combination of low growth and above-target inflation is a challenging mix for the Bank to navigate.  

The BoE will be hoping that higher energy costs and tax rises will not lead to new inflationary spiral. It’s likely it will look to maintain higher interest rates to reduce the probability of this scenario materialising. 

The risk is that this further weakens the already fragile domestic demand. In our view, the growth risks will outweigh the inflation risks over the coming quarters, and the BoE will continue to cut interest rates.  

If you have any questions about how these announcements can impact your portfolio and investment decisions, please contact your usual Evelyn Partners adviser.