USA inflation data spells more trouble for stock markets

USA inflation data spells more trouble for stock markets

A closely watched barometer of "core" USA consumer prices, which excludes the volatile categories of food and energy, rose 0.3 percent from December to January, the Labor Department said Wednesday. Food prices barely rose overall, but tomato prices shot up 16% compared with a year ago, the largest increase since 2014.

Fed officials would like to see inflation consistently above 2% to justify a faster pace of interest rate increases.

Delving deeper into the inflation figures, the increase in prices was broadly across non-discretionary items for example, vehicle insurance, medical insurance, transport costs, rents. Wall Street will be watching another inflation indicator, the producer price index, closely on Thursday.

The report roiled stocks again Wednesday after three straight positive sessions. Unsurprisingly the selloff in the United States equity markets also resumed, the Dow futures and the S&P futures were trading down just shy of 1% within half an hour of the release, however we are starting to see signs of those losses being pared with both the Dow & S&P futures down some 0.75%.

Dow futures fell more than 200 points in response to the news.

There are two sides to inflation-the kind fueled by rising consumer demand, and the kind brought on by higher wages.

The U.S. central bank has forecast three rate hikes for this year, with the first increase expected next month.

"These reports tell two stories:. that the real economy may not be as strong as we thought, but also that inflation may be a bit higher", said Paul Ashworth, chief USA economist for Capital Economics.

But he noted the Commerce Department reported Wednesday that retail sales fell unexpectedly in January, posting their biggest drop in almost a year.

Real average earnings fell 0.8 percent in January, although they are up 0.4 percent from the January 2017.

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"Inflation has been the missing piece in the puzzle for rate hikes over the past several months, which had led some members of the [Federal Open Market Committee] to dissent on rate hike decisions over the past year", said Leslie Preston, senior economist at TD. Inflation rose 2.1 percent from a year earlier and core prices increased 1.8 percent.

A handful more economists expect four rate hikes this year than in last month's poll. However, the year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January.

If the US economy fails to show any meaningful uptick in inflation as now feared, that could tie the Fed's hands when it comes to interest rate hikes and drag the dollar lower.

Historically, the PCE reports lower inflation.

In recent weeks, yields and stocks had been moving in opposite directions. But they judge their annual target on the federal government's broader personal consumption expenditure price index, which tends to show lower inflation than the consumer price index. Now another key gauge of inflation - CPI - is showing a similar upward trend.

The consumer price index only covers purchases made directly by consumers. Americans are especially paying more at the pump, with gas prices jumping 8.5 percent in the past year and transportation rising 4 percent.

NYSE Composite 12,747.18 +1.38%.

Inflation last month was driven by gasoline prices, which rebounded 5.7 percent after falling 0.8 percent in December.

Inflation fears were sparked February 2 by the latest jobs report. Brenner said he believes the 10-year could get to 3 percent rather quickly.

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