Market-moving inflation fears are probably overblown

WASHINGTON — The past week's stomach-churning stock market losses were ignited by a sudden and contagious fear of surging inflation and higher interest rates. Many investors worried that inflation would send borrowing rates up and sap corporate profits, stock prices and the U.S. economy.

Does that mean higher inflation is on the way? Not necessarily. So far, economists see little evidence that price increases are on the verge of accelerating.

Investors are "getting a few steps ahead of where we actually are," said Michael Arone, chief investment strategist at State Street Global Advisers.

The anxiety that's permeated the financial markets represents a sharp change from just a few months ago, when many investors viewed inflation as abnormally low. In November, for instance, investors expected inflation to average just 1.8 percent over the next 10 years based on inflation-adjusted bond prices. That expectation has since risen to a still-mild 2.1 percent.

For now, inflation remains historically low, as it has been the past eight years. The Federal Reserve's preferred inflation gauge shows that prices rose only 1.7 percent in December from a year earlier, below the average 2.2 percent annual increase over the past 30 years. That's also below even the Federal Reserve's 2 percent target rate.

So why did the markets suddenly panic?

The most obvious trigger was the government's monthly jobs report Friday, which showed that average hourly pay in January jumped 2.9 percent from a year earlier, the sharpest annual increase in eight years.

Increased pay levels can accelerate inflation if employers must then raise prices to cover the extra costs. Higher wages are great for employees, but they can crimp corporate profits, which can lead investors to dump shares.