Here’s Why Stocks Are Rallying Despite Another Dire Inflation Report

Topline

The stock market moved slightly higher on Wednesday even after consumer prices jumped again last month—with inflation at nearly 40-year highs, suggesting a good deal of uncertainty has already been priced into the market as investors seemed to shake off the bad news.

Key Facts

Stocks have largely held steady: The Dow Jones Industrial Average was flat, while the S&P 500 gained 0.1% and the tech-heavy Nasdaq Composite 0.2%.

The market’s small gains on Wednesday come despite consumer prices jumping another 7% last month on a yearly basis, the largest annual increase since June 1982, according to data released by the Labor Department.

While overall prices rose 0.5% from November—that was largely in-line with what economists had been expecting, not to mention a small decline from the previous month’s increase of 0.8%. 

Helping stocks hold firm despite the grim inflation data on Wednesday was comments from Federal Reserve chairman Jerome Powell a day earlier, who said tighter monetary policy was needed in order to control rising prices. 

The Fed now plans to finish tapering its monthly asset purchases by March, then begin raising interest rates shortly after—with three rate hikes projected for 2022, though some experts predict more.

Shares of tech stocks, which have suffered a steep sell-off so far in the new year, rebounded somewhat on Wednesday, with shares of Microsoft and Google-parent Alphabet each rising nearly 1.5%.

Crucial Quote:

Wednesday’s consumer price index reading, like Powell’s testimony before the Senate on Tuesday, “could have been worse,” says Vital Knowledge founder Adam Crisafulli. The slight uptick in consumer prices since last month falls in line with expectations—and given the present environment, that counts as “better-than-feared,” he says. While the numbers are “by no means good,” with inflation still running hot, they don’t fundamentally alter the Federal Reserve’s outlook or expectations.

Key Background:

The stock market erased earlier losses and surged higher following Powell’s testimony before the Senate on Tuesday. The Fed chair pledged the central bank wouldn’t hesitate to raise interest rates further than projected if higher inflation persists. “If we have to raise interest rates more over time, we will,” Powell said. “We will use our tools to get inflation back [to long-term targets].”

What To Watch For:

Will it hold? “The market is giving the Fed the benefit of the doubt – so far – but risks are rising that inflation will force the Fed into a rate-hiking cycle that results in a shock to the stock market, which is something that happened in 2018,” says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “In this case, inflation is a concern, whereas it wasn’t in 2018, and that could be the critical difference between now and 4 years ago.”

Further Reading:

Inflation Spiked Another 7% In December—Hitting New 39-Year High As Fed’s Price Concerns Rattle Markets (Forbes)

Stocks Surge After Powell Says Fed Not Afraid To Raise Rates Further If Higher Inflation Persists (Forbes)

Stocks Plunge After Fed Minutes Show Central Bank Could Remove More Stimulus (Forbes)

Gas And Meat Prices Finally Fall—But Cars, Housing, Medical Care And More Still Fuel Inflation Surge (Forbes)