Investors are increasingly focusing on inflation’s long-term outlook, even if today’s consumer-price index (CPI) reading met expectations and didn’t shake markets significantly. The latest CPI data drew investor attention as they also considered potential inflationary effects of policies proposed by Donald Trump in his bid for a second presidency.
“While investors brushed off today’s inflation report, concern is rising about its longer-term trajectory,” stated Diana Iovanel, senior markets economist at Capital Economics, on Wednesday. She noted that while immediate inflation isn’t troubling markets, the longer-term outlook has captured investor attention following the recent U.S. election.
U.S. stocks ended Wednesday with modest changes: the S&P 500 was flat, the Dow Jones edged up by 0.1%, and the Nasdaq Composite slipped 0.3%.
Keith Lerner, co-chief investment officer at Truist Advisory Services, remarked that the CPI report didn’t surprise the market, adding, “Today’s data wasn’t a game changer.”
Since Election Day on November 5, the Dow is up by 4.1%, the S&P 500 by 3.5%, and the Nasdaq by 4.3%, according to Dow Jones Market Data. This rally reflects investor optimism about potential pro-growth policies under a second Trump administration. However, Lerner pointed out that investors are weighing inflationary risks, like higher tariffs, which could boost inflation if implemented.
Rick Rieder, BlackRock’s chief investment officer of global fixed income, commented that Wednesday’s CPI report sparked considerable investor interest, given the inflation risks posed by economic growth and potential policy changes.
Despite a substantial decrease from its 2022 peak, inflation remains above the Federal Reserve’s 2% target. Core CPI, which excludes volatile food and energy prices, rose 0.3% in October, marking a year-over-year increase of 3.3%. Rieder noted that the Fed is likely to monitor inflation closely, potentially lowering interest rates again in December depending on the inflation outlook.
The bond market also reacted, with the 10-year Treasury yield ending slightly higher at 4.448%. Lerner observed that policy uncertainty under a second Trump administration might lead to more pronounced swings in the 10-year yield.
The focus on inflation has also impacted bond-focused ETFs, with both the iShares Core U.S. Aggregate Bond ETF and Vanguard Total Bond Market ETF experiencing pressure from rising yields. Rieder concluded, “With new fiscal policy goals potentially on the horizon, inflation concerns are warranted,” while acknowledging that markets await further policy clarity in the months to come.
