If the DeepSeek breakthrough was what ended the US bull market in stocks, today’s inflation report may have helped it turn the corner into a bear market. From the lofty highs US stocks have reached, there could now be a long way down.

Investors, market analysts and the Federal Reserve had all been expecting inflation to fall further this year, or at least level off, enabling the Fed to make further cuts to interest rates in 2025. Instead, this month’s consumer price index ticked back up to 3%. Meanwhile, any hopes that this might just be a blip were dashed when core inflation also rose to 3.3%, suggesting further pain for shoppers lies ahead.

Bond yields, which had fallen briefly after touching new highs in January, resumed rising. Long-term interest rates have returned to close to where they stood at their recent peak, and are approaching levels last seen early this millennium. Although Donald Trump is calling for the Fed to reduce interest rates, Fed futures show that investors now expect little monetary easing for the remainder of the year.

For the President, the news could hardly have come at a worse time. If prices continue rising, it will mean that the fall in inflation from 2022 highs bottomed near the end of Joe Biden’s presidency. Trump is not responsible for today’s bad news on inflation, but he will receive the blame nonetheless. He is, after all, the president many voters trusted to bring down prices.

Compounding this is the recent uptick in inflation expectations among American consumers after two years of decline. Given continued tightness in the US jobs market, workers expecting a rising cost of living may be in a position to bargain for better wages, which will put further upward pressure on prices. What will especially worry Trump, though, is the partisan bias of expectations. Democratic expectations of rising prices have surged since Trump took office, but among Republicans inflation expectations have plunged to zero. He is therefore certain to disappoint his supporters.

Most difficult of all, however, will be the way this development complicates his administration’s policy-making. Given the scale of the US fiscal deficit, rising interest rates will drive up debt-repayment costs, which will only deepen the budget red ink. Trump may find having to choose between tax rises or cuts to spending even deeper than what Elon Musk envisions. In such circumstances, it’s a safe bet that Treasury Secretary Scott Bessent will now be urging him to go slow on the trade war. The President’s room for manoeuvre may get a little more hemmed in.

After years in which the market sucked in capital from around the world, leading to a spectacular bull market, there are now signs that money may be quietly leaving the US and returning to Europe and Asia, whose markets are starting to out-perform America’s. If a bear market has begun in the US, there’s no telling how low things could go. US stock multiples far exceed those of other markets, and there’s a lot of money ready to go searching for other opportunities. Were US share prices to sink very far, the reverse wealth effect could then raise risks of a recession at some point in the foreseeable future.

Rising prices, steeper mortgage rates, falling wealth and a possible recession: it’s not at all the situation Trump wanted to inherit at the start of his second term of office. As today’s report demonstrates, though, it’s the one he’ll have to confront.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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