Bubblehead Investors Caught Off Guard: Key CPI Inflation Reading Hotter Than Expected, Highest Since 1982

Bubblehead Investors Caught Off Guard: Key CPI Inflation Reading Hotter Than Expected, Highest Since 1982

CPI inflation

Photo: A motorist pumps gas at a Shell station, Nov. 22, 2021, in San Francisco. (AP Photo/Noah Berger)

The consumer price index, which measures the cost of everyday consumer goods, rose a higher-than-expected 7.5 percent in January compared with a year ago, surprising some investors and sending stocks lower Thursday Feb. 10 after a rally a day earlier.

That’s the highest CPI reading since 1982, exceeding the Dow Jones inflation gauge estimate of 7.2 percent — confirmation that inflation is getting worse and that investors are expecting as many as six interest rate hikes this year.

Stock market futures, particularly rate-sensitive tech stocks, dipped after Thursday’s Labor Department report. Government bond yields rose sharply, with the benchmark 10-year Treasury note reaching 2 percent, the highest since August 2019.

By comparison, stocks rallied higher a day earlier on Feb. 9 as bulls flooded back to the market, possibly in anticipation of a lower-than-expected CPI reading. The Dow, S&P, and Nasdaq Composite all saw significant gains through noon on Feb. 9, thanks in part to rising tech shares.

“Today’s (Feb. 9) rally likely has to do with an overnight note from JPMorgan’s trading desk, which said ‘there are whispers that Thursday’s [Consumer Price Index] will print blow expectations,'” wrote market analyst Bill Poulos, co-founder of Profits Run, Inc.

“A hotter-than-expected (CPI) print … could send stocks lower,” Poulos continued. “But would it be enough to spark another major retracement? Probably not. Momentum still skews very bullish.”

While gas, food and used car prices rose in January 2022, real earnings for workers increased just 0.1 percent when accounting for inflation.

Prices for fuel oil rose 9.5 percent in January and 46.5 percent year-over-year. Prices of new and used cars increased 12.2 percent and 40.5 percent over the past year.

Some online discussions have focused on predicting and opining on how fast the Fed will raise interest rates, in what increments and by how many basis points or BPs — the standard measure for interest rates that represents one hundredth of a percent. Response lag — the time it takes for monetary and fiscal policies to affect the economy once they have been implemented — was also on the minds of Twitter users.

“Recession” also featured in Twitter threads.

“Question: if monetary policy acts with a lag, why would you drip-drip rates higher, waiting to overtighten and create a recession? Why wouldn’t you go big – say 50 bps all at once – and then wait?” tweeted Edward Harrison, senior editor at Bloomberg Media.

James Bullard, president of the Federal Reserve Bank of St. Louis, said he supports raising interest rates by a full percentage point (100 basis points) by the beginning of July in response to the hottest inflation in 40 years, Bloomberg News reported.

“I’d like to see 100 basis points in the bag by July 1,” said Bullard, who will vote on monetary policy this year, said in an Bloomberg News Thursday. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

“Bullard wants the recession by August,” tweeted Sven Henrich, founder of NorthmanTrader.

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Treasury yields have climbed sharply so far in 2022 based on expectations that the Fed will soon start raising interest rates to control inflation, Wall Street Journal reported. The CPI inflation data builds on a stronger-than-expected jobs report that suggested inflation may not disspiate as fast as many investors hoped.

“Investors and economists pay close attention to Treasury yields because they set a floor on borrowing costs across the economy,” WSJ reported. “In effect, their climb means financial conditions have already started to tighten before the Fed has even raised short-term interest rates with higher yields translating to higher rates on 30-year mortgages and other forms of loans.”

Economist Mohamed A. El-Erian, president of Queens’ College at the University of Cambridge, warned against the Fed insisting in early 2021 that inflation was transitory.

“I continue to highlight this 2s-10s curve to assess how worried #markets are re a #Fed policy mistake (the second in 2 years and related closely the first one involving the prolonged misreading of inflation)
The Fed should also be worried,especially given the way this moved today,” El-Erian tweeted.

Photo: A motorist pumps gas at a Shell station, Nov. 22, 2021, in San Francisco. (AP Photo/Noah Berger)