Inflation Soars, but Market Shrugs

Time was that high price gains slammed stocks. Why not now? The ‘transitory’ narrative lives.

Ahhh, more bad inflation news. But the stock market isn’t very upset about it. This appears to be a case of the news already being baked in, and expectations that this too shall pass.

In May, the S&P 500 dipped 2.1% with the announcement that the Consumer Price Index (CPI) had popped up 4.2% on an annual basis. On Wednesday, when the US Bureau of Labor Statistics (BLS) said inflation has jumped a whopping 7% year over year, the market shrugged, with the S&P 500 edging up by 0.28%.

This morning, the Producer Price Index (PPI), measuring wholesale goods, surged 9.7%, its second largest increase since 2010. Tempering that only somewhat was that food and energy, two key inflation catalysts, were down a bit.

Reaction on Wall Street: The S&P 500 slipped just 0.3% and the Dow Jones Industrial Average stayed in green territory, up 0.33%.

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What gives? Many analysts are saying investors have gotten used to high inflation numbers and believe that the Federal Reserve, which likely aims to start tightening in March, will bring matters under control. They think today’s escalated prices will abate later this year.

“With inflation running hot, concerns about the impact of a meaningful upside surprise had increased, and simply remaining in line with expectations was practically a win,” commented Barry Gilbert, asset allocation strategist for LPL Financial.

Bank of America economists today issued a statement saying they still view inflation as “transitory” (a term Fed Chair Jerome Powell has retired), although they believe high prices will be around for a while. The American Bankers Association, meantime, issued a survey of 16 chief economists from some of North America’s largest banks forecasting inflation to slow to 3.3% this year and 2.3% in 2023.

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