Inflation Surges Unexpectedly, Challenging Trump's Economic Agenda

Price growth accelerated unexpectedly in January, posing an early challenge to President Donald Trump's economic agenda. Inflation for so-called core items, which exclude volatile food and energy prices, climbed 3.3% over the past 12 months, according to the Bureau of Labor Statistics reported Wednesday, surpassing economists' expectations of 3.2%. On a monthly basis, the inflation measure rose 0.4%, exceeding forecasts for 0.3%.

President Trump, who regained the White House vowing to lower prices "immediately," promised voters on the campaign trail that he'd begin doing so "starting on day one." However, with the president now 24 days into his new term, he cast blame on his predecessor Wednesday morning, writing on his Truth Social platform, “BIDEN INFLATION UP!”

The Challenge of Slowing Price Growth

While the BLS report's survey period does not cover Trump's first weeks in office, the fresh data indicates that the challenge of slowing price growth could be more difficult than Trump and many economists had anticipated.

Egg prices soared more than 15%, the biggest jump since 2015, largely fueled by an outbreak of bird flu. Housing costs, vehicle insurance, airfares, and education prices also rose even as prices fell for appliances, furniture, and many types of apparel—possibly reflecting holiday-season discounts.

Consumer Pullback and Market Reactions

Across the consumer economy, there are signs that many households are pulling back. McDonald's reported its biggest sales drop since the pandemic on Monday, with a slight uptick in traffic but diners spending less. With airline ticket prices climbing, low- and middle-income consumers are adjusting their travel plans for the year. Even booze sales are slipping.

Markets tumbled Wednesday morning following the inflation report, with the Dow falling some 400 points in pre-market trading. Borrowing costs represented by the 10-year U.S. Treasury bond climbed.

Interest Rates and Trade Policies

In recent months, the Federal Reserve has been holding interest rates elevated to keep inflation at bay. However, just before the report's release, Trump wrote on Truth Social: "Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!"

While lowering interest rates would give consumers and businesses more room to spend and invest, it could risk reigniting inflation.

At least one Trump economic adviser has signaled that the administration may look to curb overall consumption, which would most likely entail a slowdown in growth and even increase unemployment. Kevin Hassett, director of the National Economic Council, told CNBC on Monday that reducing demand and increasing the labor supply could address the pace of price growth.

Markets have so far ignored those remarks. Instead, many investors have zeroed in on the uncertainty created by Trump's trade policies. On Monday, he announced 25% tariffs on all steel and aluminum imports, a move some businesses have warned would trigger price hikes. Last month, Trump announced an additional 10% levy on all goods from China, which promptly rolled out retaliatory tariffs.

Expert Opinions and Economic Outlook

"We continue to believe that the Trump Administration’s trade, fiscal, and immigration policy agenda would be mildly inflationary," Bank of America analysts said in a new note to clients.

Federal Reserve Chair Jerome Powell said on Capitol Hill Tuesday that the economy was “strong overall,” with the central bank having made “significant progress” wrestling inflation toward its 2% goal over the past two years. He told the Senate that the Fed is well-positioned to adjust interest rates depending on how economic growth evolves but indicated that it's prepared to keep them higher for longer.

"If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly,” Powell said.

Neil Dutta, head of economic research at the Renaissance Macro consultancy, said in a recent note that uncertainty over White House policies is overrated compared with other looming constraints on growth. Consumers have drawn down their savings just as public-sector spending is set to fall, not only because of federal policies but also as states face budget constraints. "Uncertainty is rising while the economy is slowing,” Dutta wrote.