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Rising Inflation Could Add to Market Anxiety

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Feb. 15 2018, Updated 10:24 a.m. ET

CPI for January rose 2.1%

The CPI (consumer price index) measures the changes in prices at a consumer level. The CPI is the weighted average price of a basket of goods and services at the consumer level. The CPI includes food, medical care (XLV), transportation, housing, apparel, recreation, education and communication, and other goods.

According to the January CPI report released by the Bureau of Labor Statistics on February 14, consumer prices in January increased 0.5% (month-over-month). The index for all of the items less food and energy increased 0.3% in January.

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Why the CPI is important

Economic data that impact the Fed’s interest rate decision are followed closely, especially after recent market turmoil. The turmoil was triggered by a surprise uptick in US workers’ wage growth. The Fed set a 2% target for inflation growth. Lackluster inflation growth in the last few years has limited the Fed’s interest rate hikes. In the current environment, rising wages and a higher inflation rate could overheat the US economy, which could force the Fed to increase interest rates sooner than expected.

January CPI report

Core inflation, which excludes volatile items like food and energy, surged to 0.34% month-over-month in January—the fastest growth since March 2005. There’s some seasonality bias but the surprise was the 1.7% increase in clothing, transportation (IYT), and medical services. The increase had a combined positive impact of 11 basis points on the price index.

From the ETF space, funds like the iShares TIP bond (TIP), the Vanguard Short-Term Inflation-Protected Securities (VTIP), and the Schwab US TIPS (SCHP) invest in inflation-protected Treasury bonds that protect investors from an unexpected increase in inflation. The yield on TIP, as reported by iShares, stands near 0.61%—higher than many short-term investments available in the market today. In the next part of this series, we’ll analyze lower retail sales in January.

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