Is Last Week’s Hotter-Than-Expected Inflation Report a Game Changer for The Stock Market?

Following an initial decline, the stock market has exhibited increased volatility after the release of last week's inflation report. The report revealed a 0.4% month-over-month surge in the Consumer Price Index (CPI), surpassing the anticipated 0.3% upturn. Year over year, the CPI reflected a 3.9% increase compared to the estimated 3.7%.

The primary factor contributing to the deviation from the anticipated CPI estimate was an unforeseen spike in monthly rent, resulting in a 6.6% annualized increase for January. However, when examining the broader trend in rental data over an extended period, it becomes apparent that this monthly surge is likely an irregularity.

More importantly, there is currently no indication that the challenges in the Red Sea are causing disruptions in the supply chain that would ultimately affect the durable goods component of the Consumer Price Index (CPI).

The heightened volatility in the stock market doesn't primarily stem from the anticipation that inflation will cease its longer-term decline. Instead, it is driven by the recognition that the Federal Reserve might extend the timeline for reducing the Fed Funds Rate, presenting a potential headwind to the economy.

In conclusion, the downward trajectory of inflation is expected to become more uneven as it gets closer to the Federal Reserve's 2% target. This is likely to contribute to heightened stock market volatility throughout the year. However, the overall impact on returns may be minimal if the Federal Reserve remains committed to implementing rate cuts as anticipated.

Robert Amato, CFP®, CIMA®

Principal

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Source: The Wall Street Journal (Feb 2024). https://www.wsj.com/economy/consumers/what-to-watch-in-the-cpi-report-will-inflation-fall-below-3-ffc5859a