We just got another sign that the stock market's biggest fear isn't playing out just yet

Business Insider | Mar 13, 2018, 07.02PM IST

Wall Street Traders


  • Two recent economic reports show inflation is picking up - but not as quickly as investors had feared.
  • The real concern was about whether the Federal Reserve would be moved to raise interest rates faster than expected.
  • The correction that rocked the stock market in February coincided with a report that showed the strongest wage growth since the recession - a sign of inflation.

Wall Street got another sign Tuesday that its worst fears about inflation may have not yet been realized.

The core consumer-price index, a gauge of costs that excludes food and energy products, increased by 0.2% month-on-month in February and 2.1% year-on-year. Both prints from the Bureau of Labor Statistics were in line with economists' forecasts.

"While there is evidence of building inflationary pressures in certain components, the annual growth rates (especially for the core CPI) do not suggest a breakout in inflation yet," Ben Ayers, a senior economist at Nationwide, said in a note.

The correction that rocked the stock market in February was preceded by a report that showed the strongest wage growth since the recession - a sign the economy was heating up. Investors feared that as inflation reached and possibly exceeded the Federal Reserve's 2% target, the central bank may be inclined to raise interest rates faster than expected.

The January CPI report, released last month, added fuel to the fire when it showed that core consumer prices (excluding food and energy costs) rose by 2.1% year-on-year, more than expected.

The CPI and jobs reports for February showed inflation was heating up, but perhaps not quickly enough to immediately alter the Federal Reserve's plans. In other words, the best-case scenario for the stock market remains in place: the economy is expanding, but not quickly enough to spike borrowing costs.

Friday's jobs report showed average hourly earnings earnings increased by just 2.6% from a year earlier, while the previous month's print which caused the initial scare was revised down to 2.8% from a 2.9% pace.

Stock futures initially jumped after the inflation data on Tuesday, but quickly pared gains following news that President Donald Trump ousted his secretary of state, Rex Tillerson.

In the coming months, inflation could jump even more, although economists are aware of this. Because cellphone plans and physicians' services cheapened significantly around March and April last year, there's expected to be an outsized year-over-year jump in inflation.

The Federal Reserve meets again next Tuesday and Wednesday. Traders see a 100% probability that it would raise interest rates at that meeting, according to Bloomberg.

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