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Inflation data in the U.S. will be closely watched by the markets this week. On Tuesday, the U.S. Consumer Price Index will be released to much anticipation. The expectation is for the index to be up by 0.4% for the month and 5.3% year-over-year. The forecast for core inflation, which does not include the more volatile food and energy components, is to rise by 0.3% for the month and 4.2% year-over-year.
Inflation is now running above the Federal Reserve’s target level of 2%. Two of the biggest questions for markets are whether this trend will continue and what the implications will be for monetary policy and market prices. The debate over whether the increase in inflation is transitory or more permanent has solid cases on each side. Market pricing in stocks and bonds is set up for inflation pressures to decrease over the coming months and quarters. As a result, any indication that inflation will run higher for longer could cause prices for financial assets to fall and volatility to increase. Markets are not priced for higher inflation or less monetary stimulus.
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