Written by LPL Financial

Inflation and economic growth are key drivers of long-term rates, and rising rates can lead to higher borrowing costs for individuals and businesses, potentially impacting consumer spending and profit margins for businesses. Given the recent market volatility, the January Consumer Price Index (CPI) report, which will be released on Wednesday, February 14, could become a focal point for markets. Consensus forecasts expect that both headline and core CPI (which excludes volatile food and energy prices) may slow down on a year-over-year basis to 1.9% and 1.7%, respectively, but given the focus on rising rates and their potential impact for equity prices, any upside surprise in CPI could lead to additional volatility.

As a reminder to those of us who may have forgotten, February 14 is also an important day for another reason—it’s Valentine’s Day. Inflation’s impact on stock market performance is certainly an important topic, and markets will indeed scrutinize the January report to see what it means for stocks moving forward (we will post a blog about the CPI release on lplresearch.com on Wednesday as well). However, the fact that CPI will be released on one of the major gift-buying holidays of the year also provides a good opportunity to see how inflation can impact everyday life.

Recent Market Volatility

Rising inflation expectations and a corresponding rise in long-term interest rates have been a focal point for markets over the past week, and have been identified as at least one of the causes behind recent stock market weakness. Worries about the potential for rising wages to lead to increased inflation and a more aggressive Federal Reserve (Fed) caused interest rates to move higher. This, along with a spike in the VIX Volatility Index (commonly viewed as the market’s fear gauge), led to an unwinding of trades that had bet on a continuation of last year’s low volatility theme, resulting in the S&P 500 Index falling into correction territory (a drop of 10% or more from all-time highs) for the first time in two years. We discuss this chain of events, as well as where we think markets may go next, in this week’s 
Weekly Market Commentary, “Correction Perspectives”.