The CPI Just Confused the Stock Market

Tuesday morning showed investors how the stock market can whiplash back and forth. After having gained ground in early morning futures trading, major benchmarks fell when the regular trading session started, only to turn around and climb within the first hour. By 10:30 a.m. ET, the Dow Jones Industrial Average (^DJI -0.54%) was back down by 0.3%, and the S&P 500 (^GSPC -0.33%) had dropped 0.1%.

The big news on Tuesday was on the macroeconomic front, as the latest reading on inflation came courtesy of the Bureau of Labor Statistics and its Consumer Price Index (CPI) report. Although the headline number was higher than some had expected, the overall trend in year-over-year inflation remained downward, and that seemed to give investors more optimism about the future.

Person at desk with hands raised in a confused gesture.

Image source: Getty Images.

More volatility in inflation

After almost no inflation over the past couple of months, the January CPI report showed that price increases haven’t gone away. For the month, the CPI was higher by 0.5% on a seasonally adjusted basis compared to December 2022. That brought the CPI’s gain over the past 12 months to 6.4%. That’s more than triple the Fed’s 2% target, but it’s also the lowest year-over-year reading since October 2021.

As has been the case in recent months, energy prices were the biggest contributor to volatility. A 2.4% rise in gasoline prices and a 6.7% jump in natural gas utility costs pushed the energy index higher by 2%. Food costs were also higher by 0.5% for the month, keeping the annual rise in the food component of the CPI above 10%.

The core CPI, which excludes food and energy, was up 0.4% for the month. Higher prices for medical care and apparel outweighed declines in used vehicle prices, and higher shelter and transportation services costs also boosted the core index. Core CPI is up 5.6% from where it was 12 months ago.

US Consumer Price Index MoM Chart

US Consumer Price Index MoM data by YCharts

The wild card for central bankers

The main problem that the rise in the monthly CPI raises is that the Federal Reserve has said that it’s looking for signs of consistent disinflationary trends. Although the CPI readings from November and December were encouraging, the tick upward in prices in January could dissuade policymakers from stepping back from their aggressive series of increases in the federal funds rate. With the current target for fed funds at between 4.5% and 4.75%, yields on six-month Treasury bills jumped above the 5% mark, suggesting a pair of additional quarter-percentage-point increases on the table in the coming months.

Yet there weren’t obvious responses to the news among the stocks in the Dow Jones Industrials. Financial stocks, which tend to be sensitive to interest rate trends, were little changed on the day. Industrial stocks that tend to prefer stronger economic growth were mixed, with Boeing on the rise but Caterpillar leading the Dow’s decliners. Worries about the Fed going too far have caused many to anticipate an economic recession, even though the consumer economy has remained resilient up until now.

One more chance

For those who fear the Fed, though, the good news is that central bankers will get one more chance to look at inflation readings before they next meet. The February CPI numbers will come out on March 14, which is immediately before the two-day Federal Open Market Committee meeting on March 15 and 16. If the recent jump in inflationary pressures turns out to be a one-month phenomenon, then stock market investors might get clearer signs of a pause in rate hikes around the corner. Until that’s confirmed, though, Wall Street expects a bumpy ride.