Swell in Consumer Prices Gives Markets Some Pep

MANHATTAN (CN) — Markets gained steam on Wednesday after a surprise report showing a better-than-expected rise in consumer prices. 

By the closing bell, the Dow Jones Industrial Average had gained 289 points, a 1% increase, though the S&P 500 and Nasdaq did far better, gaining 1.4% and 2.1%, respectively.

Consumer prices for items except food and energy in the United States increased 0.6% last month, showing that segments of the U.S. economy are on target for a quicker recovery than originally thought.

The overall boost to core inflation is the same as observed in June and is the largest since 1991, according to the Bureau of Labor Statistics.

Most of the lift was due to a 5.6% increase in gasoline prices — which accounted for a quarter of the total increase — as well as the 5.6% rise in fuel oil. Despite a historic low in demand, airline fares rose 5.4% last month following a 2.6% increase in June. 

Many economists had predicted an overall increase to July’s core inflation of about 0.3%, which indicates those businesses that were able to ride out the lockdown may see a corresponding rise in economic activity. 

Not all segments saw prices go up, however. The food index fell 0.4% in July while the food-at-home index dropped 1.1%. Piped gas also fell by 1% last month.

Also lost amid the good news was that the rise in core inflation also led to a 0.4% decrease in real average hourly earnings last month. Average hourly earnings are still up, year over year, by 3.7%.

“While encouraging, inflation risks are still heavily tilted to the downside in an environment of a stagnating recovery, reduced fiscal relief, and a still largely uncontained health crisis,” said Oren Klachkin, the lead U.S. economist at Oxford Economics. 

ING chief international economist James Knightley wrote that the increase in core inflation was “quite a surprise” but that it is “more of an unwinding of the strains caused by Covid-19 shutdowns rather than a signal there is a meaningful pick-up in medium-term price pressures.”

Hopes for a fourth stimulus bill are dimming, as House Speaker Nancy Pelosi said on Wednesday that the ideological gap between Democrats and Republicans on the proposed bill is “a chasm.”

Over the weekend, President Trump issued several executive orders to tap into unused funds from previous stimulus legislation to partially extend federal unemployment and to create a payroll tax holiday. 

Meanwhile, the coronavirus still rages. According to data compiled by Johns Hopkins University, more than 20 million have contracted Covid-19 worldwide, while 744,000 have died. In the United States, more than 5.1 million have been confirmed infected while 165,000 have died.

Others worry that the uptick in core inflation portends problems down the road.

“I’ve expressed my worry for months now about the inflation that I see coming,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “If this continues, it will be the Fed’s worst nightmare no matter how many times they say they want higher inflation.”

The 1.6% year-over-year increase to core inflation is still below the 2% target set by the Federal Reserve, which has anticipated keeping interest rates low for potentially years to come as inflation remains relatively low. 

“Consumer prices continue to rebound from the pandemic shock, but there’s still a long way to go to a full recovery,” Klachkin said, adding that inflation likely won’t hit the Fed’s 2% target until a vaccine or therapeutic is found for Covid-19. 

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