Consumer Price data was released this morning by the U.S. Bureau of Labor Statistics, showing month-over-month changes in inflation after removing the impact of food and energy rose .4% versus expectations for a 0.3% increase. This was unchanged from January. On a year-over-year basis, CPI ex-Food and Energy rose 3.8% versus expectations for 3.7%. With investors putting their hopes on the Fed cutting rates this year, this hotter than expected inflation reading comes as a bit of a surprise. The all-in inflation reading came in right at expectations of 0.4%, but also was an increase of 0.1% versus last month. On a year-over-year basis, CPI rose 3.2%, which was 0.1% higher than consensus expectations for a 3.1% increase as well as being 0.1% higher than January.

We were concerned when the Price component of the ISM Service index rose in January to 64 from December’s 56.7 reading. Concerns were heightened last month when both CPI and PPI data (consumer prices and producer prices) came through higher than expected. While it isn’t time to panic, higher inflation than expected comes at a time when the markets have been priced for lower rates. To the extent rate cuts get pushed out, markets should be forced to rethink valuations.

Malcolm E. Polley, CFA®
Chief Market Strategist