Inflation is here. And right now, the stock market seems okay with it.
On Wednesday, we learned that consumer prices rose more than expected in January, and on Thursday we’ll get another reading on price pressures in the economy from the January print on producer prices.
Economists expect that on a core basis — which excludes the more volatile costs of food and energy — producer prices were up 2% over last year in January. Producer prices tend to lead consumer prices as they reflect pricing pressures on the supply, rather than demand, side of the consumption chain.
Elsewhere on the economic data schedule Thursday investors will get readings on initial jobless claims, industrial production, and the February check on homebuilder sentiment.
Markets will also keep an eye on Treasury markets, which saw most of the action Wednesday as the 10-year Treasury yield climbed as high as 2.91%, a new four-year high and rates were higher across the curve. Stocks also rallied on Wednesday as each of the major averages gained more than 1% as equity investors continue to sort through the technical damage done to markets in the last two weeks.
You’ll recall that higher inflation, and hence a more aggressive Fed, was initially seen as the reason for the pressure equity markets came under at the beginning of the month as investors anticipated a more aggressive rate-hike cycle from the Federal Reserve and the potential for a downturn in the economy coming sooner than expected.
These fears appear to be allayed somewhat, despite inflation data confirming this earlier thesis. Perhaps the market, then, isn’t actually as worried about inflation as it seemed.
Some economists, however, cast doubt on the idea that Wednesday’s inflation report really warranted a wholesale shift in the economic narrative. “The January core CPI numbers are consistent with our view that the U.S. faces bigger upside inflation risks than markets and the Fed believe,” said Ian Shepherdson, an economist at Pantheon Macroeconomics. “But we aren’t about to revise up our Q4 core CPI and PCE forecasts—2.5% and 2.0% respectively—on the back of one outsized reading.”
Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, said Wednesday that, “It’s clear from some of the recent data that inflation is rebounding today, yet we also think inflation will come in different forms, and in different ways, than it has historically.”
Rieder sees inflation not accelerating as the economy enters the later stage of the cycle given the downward pressure that technology puts on pricing across the economy.
“Inflation has been held down by the productivity-enhancing capacities of technology, like its ability to substitute for more expensive labor, and the extraordinary price transparency now afforded by the web,” Rieder wrote. “And while we see the signs of inflation firming now, as the cyclical recovery of the goods sectors continues apace and as wages accelerate that does not mean that technology’s disinflationary influence has abated.”
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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