Investors fear spike in inflation

Inflation is now the enemy of stock investors.

Why?

If long-dormant inflation spikes, that means interest rates, which are already on the rise, will go up even more.

That’s why investors early Wednesday will be paying close attention to the release of the January consumer price index (CPI). The January CPI is the first inflation-specific data point since the Feb. 2 jobs report that showed the fastest rise in hourly wage growth since 2009. That strong pay number spooked investors, sparking a sell-off that knocked stocks down 10% from their Jan. 26 peak and into correction territory for the first time in two years.

“The market is focused on CPI to see if there is confirmation that inflation is picking up,” says Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. “Inflation expectations have been rising, and investors are worried about an upside surprise.”

So what are key levels investors need to watch? Economists expect January CPI to rise 1.9% year over year. And socalled “core” CPI, which strips out volatile food and energy costs, is seen rising at a 1.7% annual clip.

Markets would greet an increase in consumer inflation that is in line with expectations with “relief,” Jones says. Stocks and bonds, however, could be vulnerable to strong inflation data.

The fear is that the combination of an improving economy, coupled with stimulus from tax cuts and government spending, will push inflation — and interest rates — up too far, too fast.