Markets Are Ignoring 8.5% Inflation Spike And Watching This Number Instead

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The stock market moved higher on Tuesday, even after consumer prices spiked 8.5% in the 12 months ending in March, as some investors hope that inflation is showing signs of moderating, with core inflation—excluding volatile food and energy prices—coming in lower than expected.

Key Facts

Stocks ticked higher early on Tuesday: The Dow Jones Industrial Average rose 0.8%, nearly 300 points, while the S&P 500 gained 1.1% and the tech-heavy Nasdaq Composite 1.6%.

Consumer prices for March increased 1.2% from last month and 8.5% annually, according to data released Tuesday by the Labor Department, rising at the fastest pace in four decades.

While the overall inflation number was red-hot, markets got a boost from core inflation, which excludes volatile food and gas costs, rising just 0.3% in March—a smaller increase than last month and lower than what economists were expecting.

Some investors are betting that the lower core consumer price reading could mean inflation is showing signs of peaking, especially after prices also fell in several other recently spiking categories, such as used cars.

Gas and food prices were among the largest drivers of higher prices in March, with gas prices spiking over 18%—driven by Russia’s invasion of Ukraine—and accounting for over half of the monthly increase.

Government bond yields, which surged higher a day earlier, retreated slightly on Tuesday, helping boost stocks—though the benchmark 10-year Treasury note remains above 2.7%, its highest level since January 2019.

Crucial Quote:

The “silver lining” from today’s report is certainly the lower-than-expected core inflation number, says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Despite the fact that energy, food and other essential items hit consumers hard, they are all stripped out of the Core calculation that the Federal Reserve follows more closely,” he explains. “Given that the Fed is more likely to pay attention to the Core number, today’s report could be short-term good news for the stock and bond markets.”

What To Watch For:

“​​Inflation will soon likely peak but the cool down period could be painfully slow,” predicts Jeffrey Roach, chief economist for LPL Financial. “Food prices and vehicle prices will likely lead the way in releasing inflationary pressures.”

Further Reading:

Inflation Hits 40-Year High—Spiking 8.5% In March As Ukraine Invasion Fuels Oil Prices (Forbes)

Dow Falls 400 Points As 10-Year Treasury Yield Hits Highest Level Since January 2019 (Forbes)

Stocks Rise As Investors Try To Shake Off Inflation Fears, Recent Fed Comments (Forbes)

Federal Reserve Hints At Bigger Rate Hikes Ahead, Outlines Plan To Shrink Balance Sheet (Forbes)

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