Latest CPI data holds steady. This is what it means for advisors

There was some relief from recent downbeat economic data early Wednesday when the latest Consumer Price Index data held steady, although advisors, and their clients, shouldn’t get carried away with the positive inflation number.

Data from the U.S. Bureau of Labor Statistics show the Consumer Price Index, an important measure for inflation, increased 2.4% over the last 12 months, although this figure was in line with expectations. CPI increased 0.3% in February, also in line with expectations, after increasing 0.2% in January.

“The good news is that inflation didn’t come in higher than expected in this morning’s CPI report, however, this is backward-looking data from before the war in Iran began,” said Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, in a statement.

The numbers sent stock futures lower, with S&P 500 contracts down 0.1% and the Dow Jones Industrial Average Futures shedding 0.6%. 

Geopolitical issues, however, continue to cast their shadow with the Iran war now in its 12th day. Northlight Asset Management’s Zaccarelli noted that the recent large jump in oil prices is driving markets.  “Just witness the peaks and valleys in equities, which have been moving inversely to the oil price, as the news flow changes – so if the war is limited in duration and supply disruptions are remediated, then equities will be able to resume rising and will effectively look though this conflict,” he said. “On the other hand, if the war lasts a lot longer than a month and causes true supply destruction in the oil markets, then we could be in a different situation, one which will take much longer to recover from.”

Oil prices have soared amid the war in the Middle East, which has significantly reduced the flow of shipping through Strait of Hormuz, a vital conduit for the oil industry and global supply chains. Brent crude futures are at $86.70 Wednesday morning, after going on a wild ride earlier this week.

Brad Conger, Chief Investment Officer at Hirtle Callaghan said that the latest CPI data should be viewed within the context of soaring energy costs amid the ongoing Iran conflict. “Reading too far into today’s CPI in most respects amounts to arguing over the dinner menu on the Titanic, since the economy has struck an energy cost iceberg,” he said, in a statement. “In our view, it confirms that underlying inflation is tracking with employment – which is to say – downward trending.  We are adding to our long duration in Treasurys.”

All eyes are also on the Federal Reserve’s next move. In January the Federal Reserve kept its policy rate steady at 3.5% to 3.75%, despite coming under intense pressure from President Donald Trump to lower interest rates.

The Federal Open Market Committee will hold its next meeting on March 17 and 18, with the Fed’s next policy announcement coming on March 18.

The central bank is widely expected to continue its patient approach to rate cuts. Zaccarelli said that Northlight Asset Management agrees with the general assumption that the Federal Reserve is going to be “on hold for longer now” with regard to a rate cut. The Federal Reserve, he explained, is waiting to see if inflation expectations rise and become embedded, or if everything will go back to where it was prior to the military operations in the Middle East.