Consumer Prices Trend is Bigger Than Fed Moves for Investors

Wednesday's consumer price index release will prompt another round of speculation across Wall Street, as financial professionals handicap its impact. But this is simply the latest piece of a much bigger puzzle, one that might be bigger than anything the Fed can control. 

Consider this: we had an extended period of very low inflation, near 1%, and the stock market flourished. Then, the Core CPI (which excludes the important yet volatile food and energy components) spiked, sending the S&P 500 into a tailspin for a while.  

However, the market rebounded sharply from its worst levels, and appeared on the way toward much higher highs, driven by investors’ expectation that CPI inflation was receding for good. Break out the cotton candy and the ponies! 

This was the story of 2022 and 2023. But it was also the story of the early 1970s. Some investors have already moved on to how to invest in “this new bull market we now have.” Maybe so.  

Consumer Price Index Trends Look Like 1970s

But the only analog close to the present day is the 1970s. And back then, when markets were less vital to consumer wealth (they had pensions instead of 401ks), CPI re-accelerated. When it first dipped, inflation was not dead. It was just sleeping. Unplug the cotton candy machine, return the ponies to the barn. 

Each new month’s CPI release is another piece of the puzzle for investment advisors and investors. One thing that tends not to change over time is human nature. Market trends start with events, but the biggest changes in wealth occur due to emotional reactions prompted by those events converting into firmer trends. A reversal higher in CPI over the next several months, even if not in a particular month’s data point, is as important a trend to watch as any now. 

It is not 1970. And while a 24/7 global information cycle, frequent Fed-speak, and a stubborn set of economic concerns do not by themselves move markets, emotional reactions do. And an eventual reversal in the CPI trend is one potential emotional source, given how aware consumers have become of how it impacts them.  

So, take CPI data points one at a time, but plot out the longer-term trend. Because during the 1970s, when high inflation dipped, but didn’t leave for more than a decade, the stock market made no progress for more than a decade.