Fears of Inflation Materialize in Underestimated January CPI

According to the CPI report released on Wednesday morning and various news sources, an underestimated rise in inflation has led to fears that a period of low inflation is coming to an end.

WSJ

In the 12 months to January, overall prices rose 2.1%, beating economists’ expectations for a 1.9% rise. A jump in gasoline prices in January helped drive the increase. When stripped of volatile energy and food prices, the index was up 1.8% on the year.

Though it signals a strengthening economy, price pressures are getting investors nervous. Yields on inflation-sensitive U.S. Treasury bonds have been rising. Stocks – whose values tend to fall when borrowing becomes more costly—have stopped an upward run and entered a new phase of volatility.

Bloomberg

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said the new data cement the likelihood of a policy move when the Federal Open Market Committee gathers next month and increase the chances that officials will forecast four interest-rate hikes this year, up from three.

“To the extent markets had been dismissing the idea that inflation could firm, that was a mistake. Now markets are repricing to reflect that inflation risk,” said Feroli, who formerly worked at the central bank. While Wednesday’s data don’t necessarily mean a significant acceleration is coming, “I definitely expect the numbers to continue to push up,” he said.

Rising inflation and interest rates will affect the market over the next couple of months. How much of an effect do you think these factors will actually have on market performance? Let me know what you think.