Ruh-Roh: Inflation Is Running Hot Again

When I was a kid, I loved watching The Jetsons and Scooby-Doo, popular cartoons that premiered on TV in the 1960s. Both shows featured dogs (Astro in the former, Scooby-Doo in the latter) who spoke broken English with many r’s.

“Ruh-Roh” started as a catchphrase in those cartoons and went on to become common slang. The inflation data this week made me think: Ruh-Roh.

How worried should you be about this week’s negative inflation news? Let’s unpack the busy week of data and its implications for the stock market.

The U.S. Bureau of Labor Statistics (BLS) reported the producer price index (PPI) for January, and it showed surprisingly “sticky” inflation.

The PPI climbed 0.3% for the month, the biggest move since August. Economists had expected an increase of just 0.1%. PPI fell 0.2% in December.

Excluding food and energy, “core” PPI rose 0.5%, also against expectations for a 0.1% gain. PPI excluding food, energy and trade services jumped 0.6%, its biggest one-month advance since January 2023.

Producer prices measure what businesses pay for raw materials at wholesale prices. As such, the PPI serves as a leading indicator for the consumer price index (CPI). The BLS reported on Tuesday that the CPI for January also came in hotter-than-expected.

Year-over-year, headline CPI inflation stood at 3.1%, slightly lower than the previous month’s 3.4% but surpassing forecasts of 2.9%. Core inflation, which excludes volatile food and energy prices, rose by 3.9%, consistent with the previous month but surpassing predictions of 3.7%.

Inflation fears have returned to Wall Street, weighing on stocks. Concurrently, interest rates have jumped higher. The benchmark 10-year U.S. Treasury yield (TNX) has reached dangerous levels (see chart, with data as of market close February 16).

Disappointing retail sales figures released Thursday somewhat mitigated worries about inflation. The U.S. Census Bureau reported that retail sales fell 0.8% in January from the month prior. Economists had expected a 0.2% decrease in spending.

Excluding volatile categories like autos, gasoline, food, and building materials, control group retail sales witnessed a 0.4% month-over-month decrease, indicating a potential slowdown in consumer-driven gross domestic product (GDP) growth moving forward.

That said, labor market indicators continue to exhibit resilience, offering sustained support to consumers. The latest figures on initial jobless claims, released Thursday by the Labor Department, revealed a decline to 212,000, marking the most favorable reading in over a month.

While weekly fluctuations are common, the consistent trend of low 200,000-level claims over recent months underscores the enduring strength of the labor market, reinforced by January’s employment gains.

Don’t lose hope over inflation. The main causes of global inflation, i.e. supply chain chaos caused by the pandemic and Russia-Ukraine war, have largely mended. Inflation is likely to continue falling this year, but not necessarily in a linear fashion. We’ll experience blips and anomalies along the way.

Corporate earnings are a bright spot for the stock market, as operating results continue to come in better than expected. For fourth-quarter 2023, the blended year-over-year earnings growth rate for the S&P 500 is 3.2%, according to data released February 16 by FactSet. That figure compares to a blended earnings growth rate of 2.8% last week.

Bellwether technology stocks have been for the most part beating on the top and bottom lines, fueled by enthusiasm over artificial intelligence (AI). Will the bloom come off the AI rose this year? Not likely.

WATCH THIS VIDEO: Will The “Magnificent Seven” Ride High in 2024?

This week, chipmaking giant Nvidia (NSDQ: NVDA) revealed in regulatory filings that it had initiated major stakes in several publicly traded AI companies.

Nvidia, a denizen of the “Magnificent Seven,” is scheduled to report operating results on February 21, for the quarter ended January 2024. Analysts expect Nvidia to put in another blockbuster performance, largely due to demand for its AI chips. But inflation hasn’t been conquered and bond yields are rising, a dynamic that’s bad for tech stocks in particular and the broader market in general.

The main U.S stock market indices closed Friday in the red as follows:

  • DJIA: -0.37%
  • S&P 50: -0.48%
  • NASDAQ: -0.82%
  • Russell 2000: -1.39%

The TNX jumped 1.30% to close at 4.29% (see above chart). The CBOE Volatility Index (VIX) climbed nearly 2% to hit about 14.

Taken together, the combined insights from the latest data concerning PPI, CPI, retail spending, jobs, and corporate earnings depict an economy that remains resilient but on track to decelerate in the early-to-mid stages of 2024. Rates will come down this year; it’s just a question of when.

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John Persinos is the editorial director of Investing Daily.

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