If you looked at your investment accounts today, you might have been pleasantly surprised to see stocks rising as they extend Friday's rally on the heels of a strong jobs report which alleviated fears of a recession.
And that rally could be boosted this week, when the Consumer Price Index (CPI) is released on Thursday. The CPI will let us know how much inflation is still battering our wallets, and could signal to investors what the potential next steps from the Federal Reserve will be.
Economists are forecasting that the rate of inflation eased to 6.6% year-over-year in December, in a steep drop from 7.1% the month before. A big dip in inflation could push the Fed to be a little more moderate in its interest rate hikes this year. The Fed racked up four rate hikes of 75 basis points each beginning last June, and followed those with a 50-point increase in December. If the CPI shows inflation did take a big dip, you might see investors celebrate and stocks soar on bets that the Fed will pursue a smaller interest rate increase later this month.
But if inflation remains persistently high, or doesn't decline as much as expected, concerns will likely grow again that the central bank might give us another large rate hike, which would make borrowing money more difficult and expensive. Rate hikes also cause economic pain by slamming the brakes on the economy, which could cause higher levels of unemployment, or even a recession.
Currently, markets are predicting a 77% chance that the Fed will hand us a rate hike of 25 basis points at its next meeting that kicks off at the end of the month.
- Kristin
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