US CPI data: How inflation impacts stock market investment

Despite efforts by central banks, inflation is slowly declining but stubbornly high in the majority of significant developed economies, including the UK and the U.S. Consumer Price Inflation (CPI) in the US is currently 6.4%, which is slightly more than anticipated but lower than the 40-year peak of 9.1% in June 2022. According to data released on Wednesday, the UK’s inflation rate decreased for the third consecutive month in January to 10.1%, which was below analysts’ estimates but still five times more than the Bank of England’s objective.

Markets are now betting on higher interest rates for a longer period of time, as they begin to heed the message from central bank officials, including those from the United States Federal Reserve, the Bank of England, and the European Central Bank, that there is still working to be done to cool inflation in the face of robust labour markets and wage growth.

Although the rate of price rise is falling, the prices of goods and services are still increasing by 6.4% as seen in January. The inflationary environment has a direct and indirect impact on stock market investments. “Stubborn inflation affects stock markets because central banks, including the Fed, BoE and ECB, will have to continue to step in and raise interest rates. This means people adjust and rein-in their spending, it cools the economy and companies can struggle to make profits,” says Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations.

“Stock markets are correlated to the profits of the companies within that particular index. In this environment of higher rates for longer than had previously been anticipated, some companies are going to find it difficult to maintain margins and, as we’re now seeing, are failing to report earnings as had been expected. In other words, if costs are going up firms can’t maintain margin, so that company is unlikely to be a good investment until things change,” adds Green.

Friday’s report from the Commerce Department showed that consumer prices rose 0.6% from December to January, up sharply from a 0.2% increase from November to December. On a year-over-year basis, prices rose 5.4%, up from a 5.3% annual increase in December.

Excluding volatile food and energy prices, so-called core inflation rose 0.6% from December, up from a 0.4% rise the previous month. And compared with a year earlier, core inflation was up 4.7% in January, versus a 4.6% year-over-year uptick in December.