Stocks sink after inflation rose more than expected in January

US stocks rebounded from their worst levels of the day Tuesday following a stronger-than-anticipated increase in consumer prices.

The inflation figures fueled more fears that the Federal Reserve will raise interest rates for longer than the market had hoped. Several Fed members made speeches Tuesday in which they talked about how the fight against inflation is not yet done. 

Rising prices may have not put a dent in consumer spending, though. Retail sales figures for January are due out Wednesday morning, and economists are predicting a solid increase in sales following two months of declines. 

In corporate news, shares of Tesla (TSLA) rallied 7.5% despite reports that workers of the electric car company in a Buffalo, NY solar panel plant are attempting to form a union.

More earnings are still coming, with investors results from Kraft Heinz (KHC) Wednesday morning and Dow component Cisco (CSCO) after the closing bell tomorrow.

The Dow ended the day down more than 155 points, or 0.6%.

The S&P 500 was flat.

The Nasdaq Composite gained 0.6%.

As stocks settle after the trading day, levels might still change slightly.

Wall Street bulls battled back against the bears Tuesday. Or is it a case of monetary policy doves fighting off inflation hawks? No matter who your investing animal spirit is, one thing is certain: Stocks enjoyed a solid rebound in the late afternoon after a mostly blah morning and midday trading session.

The Dow was down only 60 points, or 0.2%, after falling around 400 points earlier. 

The S&P 500 gained 0.2%. 

The Nasdaq Composite rose 0.5%.

Both the S&P 500 and Nasdaq were down nearly 1% at their worst levels of the day.

There was no obvious catalyst for the market turnaround. The morning's consumer price figures were higher than expected and several Fed members gave speeches today suggesting that the central bank is committed to fighting inflation. But the fact that the pace of consumer price increases continue to slow may be enough to keep the rally going.

If your heart goes pitter patter when central bankers discuss inflation (you know who you are on Twitter!), then this may be the best Valentine's Day ever. Four members of the Federal Reserve (although not Fed Chair Jerome Powell) spoke on the economy today.

First up was Richmond Fed President Thomas Barkin, who is not a voting member on the interest-rate setting Federal Open Market Committee this year. Barkin said in an interview with Bloomberg TV Tuesday morning that there is "more persistence to inflation than maybe we'd all want," adding that "inflation is normalizing, but it is coming down slowly." 

Dallas Fed President Lorie Logan, who does have a vote on the FOMC this year, said in a speech later Tuesday that "we shouldn't lock in on a peak interest rate or a precise path of rates." But Logan did say the Fed will likely "need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2% target." 

The problem is trying to predict future economic data. "When inflation repeatedly comes in higher than the forecasts...or when the jobs report comes in with hundreds of thousands more jobs than anyone expected...it is hard to have confidence in any outlook," she said.

Philadelphia Fed President Patrick Harker sounded a little more dovish (i.e. less concerned about inflation) than Logan. He also is an FOMC voting member this year. Harker said in a speech Tuesday that "we are not done yet" with rate hikes but added that "we are likely close." Harker noted that "at some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place."

Last up was New York Fed President John Williams, another FOMC member and also someone whose name has been mentioned as a possible successor to Lael Brainard as Fed vice chair now that President Biden is expected to name Brainard as his new top economic adviser.

Williams said in a speech that inflation remains his top concern and that "the inflation rate remains far too high." That means more rate hikes are likely coming...even if they slow the economy.

Along those lines, Williams said that there will likely be "a period of subdued growth and some softening of labor market conditions." He said he expected real GDP growth of just 1% this year and that the unemployment rate will "edge up over the next year" to between 4% and 4.5%. The jobless rate is currently 3.4%.

To find a silver lining in a 0.5% monthly headline inflation jump, look no further than the largest contributing factor to that increase.

Shelter inflation, which set a new record of annualized growth at 8%, accounted for nearly half of January's monthly bump, the Bureau of Labor Statistics said Tuesday. However, it lags market conditions by about 12 months. 

New rental leases have cooled a little from their mid-2022 peaks, so there's a possibility that shelter costs could come down in the months ahead, said Christopher Rupkey of FwdBonds in a note Tuesday.

"CPI inflation reared its ugly head today, but for how long is the question, as it is only a matter of time until the turn in the housing market brings inflation down later on this year," he wrote.  

Investors really did not like Tuesday's CPI report. Stocks tumbled in midday trading, as investors worried about persistent inflation leading to more interest rate increases from the Federal Reserve.

The Dow was off by about 350 points, or 1%. 

The S&P 500 lost 0.8%. 

The Nasdaq Composite fell 0.7%.

Chevron (CVX) and Boeing (BA) were the only two Dow components that were higher...and not by much. Big Data giant Palantir (PLTR) was one of the few top companies bucking the downward trend. The stock soared after the company reported its first ever quarterly profit.

Hopes that the Federal Reserve will hit the ⏸️ button anytime soon on interest rate hikes have seemingly been dashed after Tuesday's Consumer Price Index report. The pace of inflation probably isn't abating enough to convince the Fed to stop raising rates just yet.

With that in mind, futures listed on the Chicago Mercantile Exchange were pricing in a nearly 94% chance of another quarter-point hike at the conclusion of the Fed's next meeting on March 22 as of late Wednesday morning. That would lift rates to a range of 4.75% to 5%. The remaining 6% odds are for a half-point hike.

Looking further out, it is growing increasingly clear that the market is getting used to the idea that rates are going to have to keep heading higher. Fed funds futures are showing a 78% probability of another quarter-point hike in May, to a new range of 5% to 5.25%. That's up from a mere 33% likelihood for a May rate increase that was priced in a month ago.

"Inflation is still very elevated compared to normal levels. The Fed will need to remain hawkish and raise rates most likely at least two (possibly three) more times," said Eric Sterner, chief investment officer at Apollon Wealth Management, in an email.

"We will most likely be under restrictive rate levels for all of 2023 until inflation is brought down to normal levels," Sterner added.

US Treasury Secretary Janet Yellen on Tuesday morning renewed warnings that Congress must lift the debt ceiling to avoid “economic and financial catastrophe.”

The failure to raise debt limits, Yellen said at a conference for county officials in Washington DC, is a "pressing issue that could threaten progress we’ve made over last two years," 

She warned officials that their own residents could lose jobs and that household payments on mortgages, auto loans and credit cards would rise. American businesses would see credit markets deteriorate, she added.

"On top of that," said Yellen, "it is unlikely that the federal government would be able to issue payments to millions of Americans, including our military families and seniors who rely on Social Security."

Egg prices are still going up — way up — in the grocery store. 

In January, egg prices rose 8.5% compared to the month before, according to inflation data released by the Bureau of Labor Statistics Tuesday. In the year through January, egg prices soared 70.1%. 

A highly contagious, deadly avian flu has wreaked havoc in the egg market, constraining the national egg supply. That, plus higher feed and transportation costs for producers, has raised prices. And some producers are also raising their own profits amidst the turmoil, causing some to demand a federal investigation into possible price gouging. 

In the wholesale market, egg prices hit a record in December and have been steadily falling since then. But so far, those declines haven't reached consumers, as seen in January's numbers. 

Plenty of other foods got more expensive this year as well. Some dairy product prices increased sharply: Butter spiked 26.3% and margarine rose a startling 44.7%. 

Many other staples got way more expensive over the past year. Flour jumped 20.4%, bread got 14.9% pricier, sugar went up 13.5% and milk rose 11%. Chicken prices went up 10.5% and, together, fruit and vegetable prices increased 7.2%. Hot dogs got 11.4% more expensive. Breakfast sausages went up 10.1%.

But there were some items that got less expensive. Bacon prices dropped 3.9%, and uncooked beef steaks fell 3%. 

Overall, groceries got 11.3% pricier over the course of the year, while menu prices grew 8.2%. Together, food prices went up 10.1% for the year, eclipsing overall inflation of 6.4%.

Ham prices jumped 3%, citrus fruit jumped 2.8% and packaged cookies got 2.5% more expensive. Bananas ticked up 1.5%, and rice went up 1.4%. Fresh fruit rose 0.8%. 

But it's not all bad news. There were plenty of items that got cheaper last month. 

Pork chops and hot dogs each fell by 3.5%, and fresh vegetable prices went down 2.3%. Tomatoes in particular saw a sharp decline, dropping 7.7%. Butter fell 1.7%, and milk 0.4%.

President Joe Biden called the January Consumer Price Index report “good news for families and businesses across the country,” shortly after the report was released on Tuesday – despite the report showing inflation surged by the most in three months. 

“Today’s data confirm that annual inflation has fallen for seven straight months,” the president wrote in a statement. “Inflation for food at the grocery store came down again last month. Gas prices are down about $1.60 from their peak last year. And real wages for working Americans are up over the last seven months, delivering welcome breathing room for American families.” 

But he admitted there was “still more work to do as we make this transition to more steady, stable growth, and there could be setbacks along the way.

As CNN reported earlier Tuesday, inflation rose in January, according to the CPI. Despite the monthly increase of 0.5%, inflation continued to slow on a year-over-year basis to 6.4%, according to the Bureau of Labor Statistics. That's down from December's 6.5% but higher than economists' expectations of 6.2%.