Higher-Than-Expected CPI Won’t Hurt Stocks

On March 12, 2024, U.S. released inflation reports for February. Inflation Rate increased from 3.1% in January to 3.2% in February, compared to analyst consensus of 3.1%. Core Inflation Rate declined from 3.9% to 3.8%, while analysts expected that it would drop to 3.7%.

Core Inflation Rate has exceeded expectations for the second month in a row, which means that Fed may be forced to be cautious. U.S. economy stays strong, which is good for riskier assets but could present a problem for the Fed. It is hard to fight inflation at a time when the economy is growing at a decent pace despite high interest rates.

Inflation data may provide sustainable support to U.S. Dollar Index, which has recently pulled back from February highs. While Fed prefers PCE price index to measure inflation, the higher-than-expected CPI data shows that inflation has not stabilized at desired levels.

The report may rigger a pullback in gold markets, which have recently enjoyed a strong rally. Fundamentally, gold is supported by central bank purchases. Central banks buy gold to diversify their holdings. At the same time, demand from investors and traders also plays an important role in gold markets. Such demand is sensitive to Fed policy outlook, so some traders may want to take profits off the table near historic highs. However, fundamentals stay bullish for gold as central banks will continue to buy gold for reserves.

SP500, NASDAQ and Dow Jones will ignore inflation data in the near term. Investors and traders will stay focused on AI hype. If the rally in NVIDIA stock continues, the stock market will move higher. Traders bet that AI will change everything so they are not worried about minor fluctuations in Fed policy outlook. Stock traders may start to worry if inflation exceeds expectations in the next month.

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