It’s too soon for stock investors to call victory over inflation

Tuesday’s consumer price index report is forecast to show a deceleration in annual price growth to 6.2% in January. The core CPI, which strips out volatile food and energy components and is seen as a better underlying indicator than the headline measure, is projected to rise 0.4% month over month and 5.5% from a year earlier.

But a surprising rise in gas and used-car prices last month may interrupt the monthslong trend of decelerating inflation that spurred a 14% rebound in the S&P 500 from its low in October.

“Inflation has most likely peaked and now prices are on their way down, but that doesn’t mean it’s a linear way down – and that’s OK,” Nancy Tengler, chief investment officer of Laffer Tengler Investments, said. Not surprisingly, trading sessions last year were turbulent when CPI data were released, with the S&P 500 falling on seven of the 12 reporting days. Over the past six months, the S&P 500 has seen an average move of about 2.6% in either direction on the day CPI has been released – near the highest since 2009 – according to data compiled by Bloomberg.

Traders still remember the consumer price report on September 13, which sent the S&P 500 plummeting 4.3% for its worst CPI session since March 2020. “As long as the Fed is in a hawkish mode, volatility will remain firm,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “So if CPI comes in higher than expected, the market will likely sell off.”

But the stock market’s relatively muted reaction to the past two months of better-than-expected CPI prints signal that US equities may have already priced in slowing inflation, according to Bloomberg Intelligence. As a result, there may be fewer turbulent CPI days overall in 2023 if the data eases further.

The reality – at least for now – is that investors shouldn’t worry because any uptick in prices is expected to be temporary. The problem is investors have heard that before. If a strong labor market keeps wage growth elevated and prevents inflation from coming down as fast as policymakers want, the Fed may raise rates more aggressively – or hold them higher for longer – than the markets had been expecting.”The market may react negatively to a hotter CPI, but that will provide an opportunity for longer-term investors to buy equities,” said Tengler, noting that any pullback this quarter is an opportunity to buy. She added to the firm’s equity exposure during selloffs in the third and fourth quarters of 2022, and favors technology stocks like Apple Inc. over the next three to five years and is sticking with cyber security and cloud services.