Inflation rises 2.1 percent, faster than expected

The Washington Post

WASHINGTON — The consumer price index, which measures how quickly prices are going up in the U.S. economy, rose at a faster than anticipated 2.1 percent in January compared to a year ago, triggering fears of another rocky run on Wall Street.

The Dow fell more than 100 points at the open, but traders ultimately dismissed the news and the Dow closed up over 250 points.

Inflation around 2 percent is still very low, but Wall Street traders worry that this could be the beginning of a quick run up in wages and prices. There’s a big reassessment going on about what the future holds for the U.S. markets and economy.

While no one is talking about an immediate downturn for the economy, the picture looks a lot murkier heading into 2019, causing investors to question whether stocks should be so high. President Donald Trump’s tax cuts are widely expected to trigger faster growth and more inflation this year, which could backfire if the economy gets too hot.

The monthly Labor Department report Wednesday showed the prices were rising for just about everything: gas, rent, clothes, medical care and food. Americans are especially paying more at the pump, with gas prices jumping 8.5 percent in the past year and transportation rising 4 percent.

“The data raise the already high likelihood that the Fed will be lifting rates again next month, unless turmoil in the financial markets increases significantly,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

The Federal Reserve — under the new leadership of Trump’s appointee, Jerome Powell — is on track to raise interest rates three times in 2018. But if inflation continues to pick up, investors think the Fed might have to hike four times this year. Wall Street predicts nearly an 80 percent chance of a rate increase in March.

“We will remain alert to any developing risks to financial stability,” Powell said Tuesday at his formal swearing-in ceremony as Fed chairman.

Many traders read that as a signal that Powell is closely watching the stock market swings. Earlier this month, the Dow fell more than 1,000 points in a single day.

The trigger was a Labor Department report showing that wages grew at a better-than-expected pace in January. Now another key gauge of inflation — CPI — is showing a similar upward trend.

“There’s a risk that this could pour fuel on the fire of last week’s market sell-off,” said Luke Bartholomew, a strategist at Aberdeen Standard Investments. “That nervousness is not going away.”