Fed fears over inflation, markets in turmoil. Consumer prices rise again in Germany

As the Fed fears the impact of Trump’s policies on inflation, consumer prices are rising again in Germany in December. British minister Reeves is under pressure amid a weak pound and rising debt.

By Gold Avenue

The first ten days of the new year have made clear the level and the “degrees” of expectations on financial markets in the Trump era. Investors, in fact, are hoping for a sharp rise in US stocks in 2025, driven in part by potential tax cuts. However, inflation is the wildcard: if it stays close to 2%, stocks could thrive; if it moves significantly away from that sustainability threshold, it could trigger rate hikes and market losses. Meanwhile, global risks loom, including weakening currencies, trade tensions and geopolitical instability. Europe, China and Japan must contend with their own challenges, which could ripple through growth and global markets.

Federal Reserve officials fear that Trump’s trade and immigration policies could worsen inflation, as emerges from the minutes of the meeting. They intend to slow interest-rate cuts because of economic uncertainty and high inflation risks. The Fed’s benchmark rate was lowered to 4.25%-4.5%, but fewer cuts are expected in 2025. Officials noted that inflation remains above the 2% target, driven by strong consumer spending and economic activity. The Fed is taking a cautious approach, comparing its policy moves to "driving in a foggy night".

Gold is nearing a 4-week high. Gold prices rose to $2,679.91 an ounce on Friday, the highest level since December 13. Demand for safe-haven assets, fueled by uncertainty over President Trump’s policies, and the anticipation of US payroll data pushed gold up more than 1% this week. Analysts suggest that if the jobs data were weaker than expected, gold prices could move toward $2,700 and settle for a few months around that level.

In Europe, inflation in Germany has jumped, rising to 2.8% in December, above forecasts of 2.6%, according to Destatis. This is the third month in which inflation has remained above the 2% target set by the European Central Bank, with core inflation also increasing. Analysts point to rising wages and the fading impact of energy costs as key factors. The data come against a backdrop of political uncertainty ahead of the snap federal elections on February 23. Experts warn that inflation could remain stubbornly high in the months ahead.

In the United Kingdom, rising British debt costs and the slump in the pound have brought back memories of the 1976 currency crisis. Investors doubt Labour’s ability to finance its ambitious spending plans, with long-term borrowing costs reaching their highest levels since 2008. Critics argue that Finance Minister Rachel Reeves’s thin margin for manoeuvre and the surge in yields leave little room to avoid spending cuts or tax increases. For its part, the pound has fallen to its lowest level in more than a year and United Kingdom borrowing costs have hit a 16-year high, raising concerns about economic stability. Economists warn that the rise in debt costs could force the government to cut spending or raise taxes in order to comply with fiscal rules.

Still on the subject of inflation, some experts say household goods and essential products could see substantial price increases, on the back of US tariffs that could push costs even higher. Companies are expected to pass on to consumers the rising costs of food, electronics and chemical products. Shipping delays and potential US port strikes could make the situation worse. In Japan, meanwhile, wage increases are spreading across the country as companies respond to labour shortages, reinforcing the case for a rate hike by the Bank of Japan. The Bank of Japan (BOJ) could raise rates as early as its January meeting, while many companies are already planning significant wage increases. Base pay rose 2.7% in November, the fastest pace since 1992, feeding inflation close to the BOJ’s 2% target. However, uncertainty over Donald Trump’s trade policies is clouding the outlook for the Japanese economy, which is heavily reliant on exports.