U.S. Consumer Price Index Rises Sharply. Does This Mean More Fed Rate Hikes Are in Store?
Today’s U.S. inflation data significantly exceeded consensus expectations, including ours—with the Consumer Price Index (CPI) jumping 0.5% in January. U.S. core inflation increased 0.349%, which was the highest reading since March 20051—and the gains were broad-based across multiple categories. The stronger inflation news will likely help to cement a March rate hike by the U.S. Federal Reserve (the Fed) —which is something we and the markets already had conviction in.
Source: Bureau of Labor Statistics and Russell Investments calculations
In addition, some analysts have suggested today’s inflation news may cause the Fed to upgrade its guidance in the March dot plot from a 3 to 4 hike pace. While we believe that outcome is in the realm of possibility, there are a few factors we see as weighing against this:
- Such a move would be a bit bold for U.S. Fed Chair Jerome Powell’s first meeting at the helm;
- It would be a bit of an overreaction to one data point; and
- It could upset markets, which we see as an unnecessary risk this early in the year.
Market reaction to CPI report
Perhaps the biggest surprise today was that markets did NOT react more negatively to the inflation news. With a core inflation number of this magnitude, we wouldn’t have been shocked to see equities re-test their recent lows—yet U.S. Treasury yields hardly budged on the news. Why? The answer can likely be boiled down to two factors:
- Retail sales, which were released at the same time as the CPI, were softer than expected and caused many economists to downgrade their Q1 GDP growth forecasts by roughly 0.5 percentage points2; and
- A large chunk of the recalibration of yields to a faster Fed and inflationary pressures may already be in the rear-view mirror.
All things considered, we see the resilience in markets thus far today as encouraging—and consistent with our belief that last week’s market volatility is likely not the start of a bear market.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments' management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
Copyright © Russell Investments Group LLC 2018. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
1 Source: Bureau of Labor Statistics