The potential for rising inflation has been on the collective mind of market participants in recent weeks, following a larger than expected uptick in wage inflation in the January employment report, which is widely reported as one of the key factors behind the recent pullback in stocks. The latest Consumer Price Index (CPI) report seems to play into the narrative of an upside surprise in inflation, so it is no surprise that markets initially reacted by selling off, with both stock and bond prices moving lower (and bond yields moving higher), though stocks have since recovered and moved off their lows.
Consumer prices increased at a faster pace than expected in January, with the CPI rising 0.5% month over month (versus a 0.3% consensus forecast), and core CPI, which excludes food and energy, rising 0.3% (versus 0.2% consensus). Year-over-year CPI and core CPI rose 2.1% and 1.8%, respectively, compared to consensus expectations of 1.9% and 1.7%. Apparel, motor vehicle insurance, and hospital services saw the largest month-over-month gains, though these items are each a relatively small part of the overall CPI calculation (making up just 7.7% of the index combined). Shelter, which makes up approximately 32% of the index, saw less severe but still solid gains as well.
Major U.S. equity indexes showed resilience as they quickly recouped initial losses; perhaps as investors recognized that one inflation reading doesn’t constitute a trend, and the latest core Personal Consumption Expenditures (PCE) report, which is the Federal Reserve’s (Fed) preferred inflation measure, its well below the Fed’s 2% target at 1.5% year over year for December (the January report will come out on March 1, 2018). Chief Investment Strategist John Lynch commented, “This morning’s CPI report may on the margin increase the odds of a more aggressive Fed in 2018, but investors should remember that the Fed is looking for a trend of rising inflation, not a single data point. Our base case continues to be that the Fed will raise rates three times in 2018, with the first likely at its March meeting, though we will monitor inflation developments closely in the coming months.”
We would also remind investors that may have been caught up in the mania surrounding today’s inflation report that today is Valentine’s Day. If you’re still searching for a gift, or just looking for a lighter-hearted look at inflation and its impact on everyday life, take a look at LPL Research’s recently released Valentine’s Day Index. The key takeaways are summarized in the chart below: