Stocks tumble, dollar rallies as US inflation heats up

By Amanda Cooper

LONDON (Reuters) - U.S. stock futures tumbled and the dollar rose on Wednesday after data showed consumer inflation picked up more than expected in January, underscoring Federal Reserve Chair Jerome Powell's message that there is no rush to cut interest rates.

The Labor Department's Bureau of Labor Statistics (BLS) said its consumer price index rose at an annual rate of 3% in January, above estimates for a rise of 2.9%, while the core rate, which excludes food and energy prices, rose 3.3%, above forecasts for 3.1%.

The prospect of a rise in the price of imported goods as a result of U.S. President Donald Trump's raft of tariffs has prompted households and market-watchers alike to prepare for a more sustained pickup in inflation.

Futures on the S&P 500 and the Nasdaq dropped sharply, falling by nearly 1%, after having held mostly steady all day.

The dollar rallied sharply against a range of currencies, aided by a jump in U.S. Treasury yields.

The derivatives market showed traders believe the Fed may only cut rates once more this year, with just 26 basis points priced in by December, down from 35 bps before the data.

"Tariffs put the Fed in a tough place because they can reduce growth and create joblessness but can also be inflationary. The Fed might be more prone to wait things out and see where the dust settles rather than making a move before it's sure what tariff policy will be and how long it will last," Charles Schwab UK managing director Richard Flynn said.

"Hotter inflation would likely keep the Fed from cutting rates sooner, which would in turn result in a stronger dollar."

The U.S. currency rose 1.2% on the day against the yen to 154.295. The euro sank 0.4% to $1.0322 and the pound fell 0.5% to $1.2388.

The yield on the benchmark 10-year Treasury note rose by 10 bps on the day to 4.64%.

Gold extended an earlier slide, falling 1.1% on the day to $2,869 an ounce, having hit a record high just shy of $2,900 earlier this week.

Investor attention is likely to pivot to Powell's second day of semi-annual testimony, after he indicated to Congress on Tuesday that the economy was "in a pretty good place" and the central bank was in no hurry to make further interest rate cuts, unless inflation, or job market weakness made that necessary.

"Normally the second act doesn't get as many headlines but there's a chance today's CPI may solicit a slightly different tone or encourage different questions. All depends on where the release is relative to expectations," Deutsche Bank strategist Jim Reid said earlier in the day.

Meanwhile, Trump's advisers were said to be finalising plans to impose reciprocal tariffs on any country that imposes a levy on U.S. imports.

He already announced on Monday 25% tariffs on steel and aluminium up from 10%, with no exceptions.

(Reporting by Amanda Cooper; Editing by Jane Merriman)