Inflation: The Roughest Word For Markets

It’s not a four-letter word, but a nine-letter word and it has a bit of shock effect anyway — particularly for investments: inflation.

All eyes are currently on inflation in the U.S., which has been long-dormant, benign and perhaps even forgotten about as a factor in the markets. That is, until the rumblings have rumbled, of course. Broadly speaking, inflation eats at real returns on investments and elsewhere, nibbling at purchasing power and at corporate margins as costs rise — tax cuts notwithstanding.

Anxious eyes and itchy trading fingers looked for January’s core inflation report on Wednesday, a collection of data that — excluding food and energy — was supposed to show inflation up 1.7 percent year on year.

With inflation, yields go higher, and the Federal Reserve receives a signal to boost interest rates — sometimes more than three times the number Fed-watchers expect to see in 2018. As a reminder, 10-year yields are at 2.91 percent, a four-year high, up from the 2.65 percent seen only last week.

That jump came following news that consumer prices were higher than expected, up 0.5 percent, and that the U.S. Department of Labor data trounced expectations of a 0.3 percent boost. Annualized, as the Wall Street Journal noted, the jump comes out to 2.1 percent on the year for the 12 months that ended in January. That gain was tempered a bit, as the number came to 1.8 percent without the traditionally volatile impact of food and energy prices.

A few moving parts or, what the WSJ termed “aberrations,” might give hope that the data is skewed, and inflation might not be as riled up as some might fear. Consider, for example, the fact that vehicle insurance was up 1.3 percent, the highest increase in roughly 16 years.

The trend is the trend, though, as unemployment is low and it costs more to keep workers in place. The latest Consumer Price Index (CPI) news came as a January employment report showed a boost in wages also pointed to inflation. According to that report, 200,000 jobs were added last month and hourly earnings were up 2.9 percent year-over-year, the largest gain in approximately nine years.

Elsewhere, Reuters reported, the Atlanta Fed estimated the U.S. gross domestic product (GDP) will grow at a 3.2 percent annualized rate in the first quarter, lower than the 4 percent pace estimated earlier this month.

Lastly, talk about a seesaw: The Dow Jones Industrial Average was up more than 200 points at the time of this writing, roughly 90 basis points, after falling more than 150 points earlier in the day.

The latest numbers may have been digested without too much indigestion, but, then again, second thoughts may be in the offing if more data comes out showing inflation continues to get a boost.