US Stocks Fall on Hot Inflation Data, Fed Rate Cut Bets Trimmed

US stock markets experienced a downturn on Wednesday as investors digested an unexpected increase in inflation based on January's Consumer Price Index (CPI) data. The Dow Jones Industrial Average (^DJI) dropped 0.5%, while the S&P 500 (^GSPC) fell nearly 0.3%. The tech-heavy Nasdaq Composite (^IXIC) managed to stay above the flatline.

"Core" CPI, which excludes volatile food and energy costs, rose 0.4% in January, exceeding the 0.3% expected by economists. This reversal of the previous month's decline pushed back investor bets on interest rate cuts in 2025. As of Wednesday, traders anticipated only one rate cut, down from two for most of the year.

Earnings reports from several companies provided insights into corporate resilience. Kraft Heinz (KHC) shares declined after the packaged food maker's 2025 profit outlook fell short. Conversely, CVS Health (CVS) stock gained as investors welcomed a smaller-than-expected drop in quarterly profit.

Intel (INTC) continued its rally, rising over 6%, as did other AI-related stocks like BigBear.aI (BBAI).

While the hot inflation report shook up market expectations, economists don't see interest rate hikes as imminent. However, Bank of America and Deutsche Bank analysts acknowledge that the possibility has increased.

Housing inflation also intensified in January, with shelter costs rising 0.4% over the previous month. Used car prices jumped by the most since May 2023, contributing to an overall 0.5% increase in consumer prices in January.

The Nasdaq Composite turned positive in the afternoon as Tesla (TSLA) shares climbed over 4%. CVS stock also rose after exceeding earnings expectations.

Federal Reserve Chair Jerome Powell expressed uncertainty about President Trump's tariffs and their impact on monetary policy. He stressed that the Fed is monitoring various factors and will adjust its plans as necessary.

Trump dismissed the inflation report as "Biden inflation" and called for lower interest rates. However, analysts believe that the hotter-than-expected inflation data makes it more likely that the Fed will hold rates for the foreseeable future.