Markets jumping the gun on inflation fears: Economists

US stocks drifted lower on Tuesday before recovering losses by mid-afternoon, as investors look ahead to inflation data set to be released on Wednesday.

Though a hint of faster inflation could inject more panic into the market, there is more reason to think that inflation fears are overblown. As we noted yesterday, wage growth — an uptick of which was cited by many to explain the market correction — has actually declined in the past six months.

Bloomberg economists write on Wednesday that inflation may be on its way, but it is not going to be coming as soon as you might think. Citing a lag in wage pressures, they expect faster economic growth in the second half of 2017 and the start of this year will not translate into firmer inflation until the end of the year or early next.

Forecasts from Bloomberg ahead of tomorrow’s CPI numbers:

  • Consensus anticipates a 0.3% increase in the CPI headline for January following a 0.2% rise in December. Higher number would lower the annual pace of inflation to 1.9% from 2.1% previously, simply due to the base effects
  • Core CPI is projected by consensus to rise 0.2% in January following a similarly sized increase in December. We see downside risks, while still expecting the core to round up to 0.2%. If the monthly forecast is accurate, the 12-month change should edge down to 1.7% from 1.8% prior. Here too, base effects will weigh on the year-over-year pace of inflation; indeed, January 2017 was the only month last year when core prices gained 0.3% vs. the average increase of 0.1%.

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