Inflation is more complex than markets believe

A hotter-than-expected CPI report on Tuesday could send the S&P 500 down as much as 3%, according to JP Morgan’s sales and trading desk.

Investors are feeling a linear downward trend in inflation as prices have fallen steadily over the past few months. But inflation is more complicated than originally expected.

Economists expect January’s consumer price index to rise by 0.4% on a month-to-month basis. This is up from December’s -0.1% figure and means that prices have actually fallen. So far, the market has been talking about inflation in services such as travel, dining out and hospitality prices being more persistent than commodity inflation, mainly due to a very tight labor market.

But logistics managers warn that supply chains are once again jammed, which could lead to higher commodity prices. “Late fees and warehousing charges are passed on to the consumer, so the product isn’t selling as it should,” said Paul Brashier, vice president of drayage and intermodal at ITS Logistics.

Nevertheless, the market showed optimism on Monday. The Dow is up 1.11% for him, the S&P 500 is up 1.14% for him and the Nasdaq Composite is up 1.48% for him. Credit Suisse’s Ray Farris said in a report on Monday that investors may have hoped for “a Goldilocks-like combination of a rebound in industrial production and lower inflation.” Only time will tell if the comfortable narrative of disinflation, and the market’s rebellious optimism, will continue.