Inflation rose faster than expected in January
More good news for Main Street is more bad news for Wall Street.
U.S. inflation came in at 2.1% in January compared with a year earlier, another sign that wages are rising for workers. The rise in consumer prices was higher than economists expected.
In the big picture, it’s a welcome sign that reflects the health of the economy. Wages and prices have been stagnant for years following the Great Recession, even as unemployment has fallen and millions of jobs have been created added.
But for investors, faster inflation makes it more likely that the Federal Reserve will raise interest rates more quickly this year.
Dow futures quickly flipped into negative territory in early morning trading. They were up before the inflation figure came out.
Higher interest rates are bad news for stock markets because they encourage some investors to take money out of stocks and put it into bonds, which are offering better returns after years of extremely low rates.
The yield on the benchmark, 10-year U.S. Treasury bond rose to 2.87% from 2.82%, a sharp rise in just a few moments.
Fears of higher inflation triggered the sell-off that rocked Wall Street earlier this month and wiped out the year’s gains for U.S. markets. A report earlier this month showed wages rose in January at the fastest pace since 2009.
Prices rose significantly in a few parts of the economy. Prices for jerseys and other clothing rose on a monthly basis at the fastest pace since 1990. Gasoline prices were up 5.7% from December. Food prices barely rose overall, but tomato prices shot up 16% compared with a year ago, the largest increase since 2014.
All prices outside of food and energy — known as core inflation, a steadier measure — rose 1.8% compared with a year ago. Core inflation has not moved much in recent months. In fact, it was higher for parts of last year.
Fed officials would like to see inflation consistently above 2% to justify a faster pace of interest rate increases. The Fed’s committee, now led by new Chair Jerome Powell, next meets in March.