TBEN Daily Open: Inflation is more complex than it seems. But markets believe in simple disinflation

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Inflation turns out to be more complex than it initially seemed. But the markets still believe in an uncomplicated disinflationary path.

• Ford Motor announced Monday that it will work with a Chinese supplier on a new $3.5 billion battery plant for electric vehicles. The facility will be built in Michigan and is expected to open in 2026.

If Tuesday’s consumer price index report comes in higher than expected, the S&P 500 could fall as much as 3%, according to JPMorgan’s sales and trading desk.

Months of steadily declining prices have left investors feeling that inflation is on a linear, downward trend. But inflation is more complex than it initially seemed.

Economists expect the January consumer price index to rise 0.4% month on month – that’s a jump from December’s -0.1% figure, meaning prices have actually fallen. So far, market chatter has shown that services inflation – the price of travel, dining out and hospitality, for example – has proved more persistent than goods inflation, largely due to an extremely tight labor market.

But logistics managers warn that the supply chain is becoming clogged again, which could contribute to higher prices for goods. “Late fees and warehousing costs are passed on to consumers, which is why we are not seeing products drop as much as they should,” said Paul Brashier, vice president of drayage and intermodal for ITS Logistics.

Nevertheless, markets showed optimism on Monday. The Dow was up 1.11%, the S&P 500 was up 1.14% and the Nasdaq Composite was up 1.48%. Investors may have been hoping for a “Goldilocks-esque mix of recovery in industrial production and falling inflation,” Credit Suisse’s Ray Farris said in a Monday note. Time will tell if that comfortable narrative of disinflation – and challenging market optimism – holds up.

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