Where is all the Inflation?

Inflation came in much hotter than expected. Why are markets rising?

BREAKING NEWS

With markets laser-focused on inflation—a lot of investors were surprised yesterday when every major index rose in response to a hotter-than-expected CPI. The data behind the report tells us why the news is better than expected

WHAT HAPPENED

Every genuinely ‘major’ inflation driver kept cooling off in February. In particular, groceries and food away from home fell hard after being one of the biggest sources of inflation for the past year. Sure, groceries still rose by 1%—but that’s well below the Fed’s 2% yearly target. Meanwhile, expenses like auto insurance soared 20%, but those price increases aren’t expected to stick around. The only major inflation driver right now is gasoline flipping to a 3.8% monthly price increase—but that’s after 4 straight months of declines. 

MEASUREMENT ERROR

Rent and housing are the last bastions of sticky inflation, and several economists were quick to point out that the way the Fed calculates inflation can muddy the truth. Rent and Housing inflation are counted in a way that makes pricing data lag behind reality by a few months. Analysts are pointing out that currently, rent prices are starting to cool significantly. Every ‘important’ facet of the CPI is moving in the right direction for the Street, so investors are still bullish for rate cuts to hit sometime soon. 

WHY IT MATTERS

It’s been a brutal fight getting inflation down to 3%—and the market’s biggest fear is that the Fed can’t finish the job. The Fed wants to see inflation consistently in the 2% range—and the Street is really concerned Jerome Powell will go nuclear on the market by potentially raising rates one more time to fully slow the market into that 2% range. This inflation result calmed those fears, as the majority of price increases were either cyclical or volatile in nature. Rate cuts are still on the table for next week, and that’s all the market really cares about.