Before the open of the market yesterday (Wednesday) The Labor Department announced (subscription required) that core inflation (“core” excludes food and energy) increased .256% from December to January. Core prices were 2.7% higher compared with last January.
The Fed’s desired range for core inflation is supposedly between 1% and 2%, though it’s been above that since 2004. Richard Moody, chief economist at Mission Residential in Austin, TX had this to say:
One has to wonder how long core inflation will be allowed to drift on the high side of the FOMC’s comfort zone before the FOMC takes action in the form of further increases in the Fed fnds rate.
Art Hogan, chief market strategist at Jeffries & Co, was more to the point saying (subscription required) there were “creeping inflation worries” on the higher than expected CPI number and “that’s why the market sold off”.
So, essentially, the inflation number caused the market to re-calibrate its Fed expectations a little bit compared with last week. The yield on the benchmark 10 year treasury increased 5 basis points from 4.68% at Tuesday’s close to 4.73% at today’s close.
Higher interest rates, of course, increase the costs of doing business. So the Dow is down about 100 points and the S&P about 3 in the last 2 days. Interestingly, the NASDAQ is up 12 or 13 points in that same time period, affirming the strong tech sentiment I noted last week.