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Is Rising US Inflation Driving the S&P 500 Index?

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US inflation in July

According to data provided by the US Bureau of Labor Statistics, the US Consumer Price Index, or the inflation index, rose 0.1% in July 2017, compared with no change in June 2017. This inflation figure fell short of the market’s expectations of a 0.20% rise.

Core inflation, which excludes volatile food and energy components, rose 0.1% in July. On a yearly basis, the consumer price index rose nearly 1.7%, missing the market expectation of 1.8%. Core inflation rose 1.7% YoY (year-over-year) in July, mainly due to the rise in energy (XLE), food, and transport prices.

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Will it impact the S&P 500 Index?

The inflation index is one of the most important indicators for markets (SPY) and economies (QQQ) (VFINX). When the inflation index improves, it strengthens market confidence and indicates that the economy is getting stronger. When an economy gets stronger, it’s reflected in market movement. Notably, inflation is also one of the major parameters driving the Fed’s rate hike decisions.

In July 2017, the S&P 500 Index (IWM) rose nearly 1.9%. The rally in the index was mainly driven by stronger 2Q17 earnings growth, and strong consumer demand has helped the earnings of various US businesses. The rising inflation has also been improving investor confidence in the economy, boosting the index’s gains.

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