President Donald Trump’s tariffs have caused uncertainty, which has negatively impacted U.S. markets. The potential impact of these tariffs on consumers and the economy is already depressing the mood on Wall Street.
In light of this, investors are eager to learn more about whether recent concerns about stagflation—a poisonous combination of high inflation and a faltering economy—seem warranted. This brings Wednesday’s consumer-price index report into sharper focus.
According to a Wall Street Journal poll of economists, headline inflation will increase by 0.3% in February. As a result, the 12-month headline CPI rate would drop from 3.0% to 2.9%. Additionally, core inflation—a more carefully studied metric that excludes erratic food and energy prices—is predicted to rise by 3.2% annually and 0.3% monthly.
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A hotter-than-expected February CPI report and indications that the initial effects of Trump’s tariffs may spur an inflation revival pose a risk that would further limit the rate at which the Fed may cut interest rates. Crucially, market analysts believe that might intensify the stock market selloff and bring the Nasdaq Composite COMP closer to a bear market.
However, if it raises prospects of Fed rate reduction, a more positive CPI report could “go some way” to improving market mood, according to Kathleen Brooks, research director at XTB. However, she stated in an emailed post on Tuesday that a full-fledged stock market rebound might only be feasible if Trump “backtracks” on some of his most detrimental economic proposals.
You see, the majority of Americans no longer have the means to live, and they just aren’t as important to the economy as they once were.
It is largely expected by Wall Street that Wednesday’s CPI report will merely offer a preliminary glimpse of how Trump’s trade initiatives will affect inflation. According to a group of economists at BofA Global Research led by Stephen Juneau and Jeseo Park, he imposed a 10% tariff on Chinese goods in early February, which could “boost U.S. inflation” because China accounts for a significant portion of imports for clothing, electronics, and household furniture.
Notably, investors are unlikely to fully understand the impact of Trump’s tariff proposals in Wednesday’s CPI statistics because many of them are still uncertain. “But if there is any upward impact on the CPI rate due to [Trump’s tariffs], then expect a broad-based risk aversion across financial markets, which could be bad news for both bonds and equities,” Brooks of XTB said.
In order to have a clearer idea of where respondents anticipate inflation to be in a year, investors will also be keenly watching the University of Michigan’s measure of consumer inflation expectations, which is released on Friday. In February, expectations increased from 3.3% to 4.3% last month. It was only the sixth time in 14 years that there has been a one-month rise of such magnitude, and it was the greatest level since November 2023.
Tani Fukui, senior director of global economic and market strategy at MetLife Investment Management, stated that the University of Michigan’s consumer inflation measure should be interpreted with a “large grain of salt when you digest the data” because “people are reacting to prices that they see on a weekly basis.”
Nonetheless, Fukui told MarketWatch over the phone on Tuesday that if inflation expectations rise significantly over the coming year, “that clearly is going to weigh on the stock market, which in turn, is going to weigh on the consumer in a vicious cycle, but a moderate change [in inflation expectations] is not a substantial market event.”
The University of Michigan’s measure of inflation expectations is set to be released on Friday at 10 a.m. Eastern time, while the February CPI report is due on Wednesday at 8:30 a.m. Eastern time.
On Tuesday afternoon, U.S. markets ended the day lower. FactSet statistics showed that the S&P 500 SPX was down 0.8%, the Nasdaq was down 0.2%, and the Dow Jones Industrial Average DJIA down more than 478 points, or 1.1%.
