Hot Inflation Drives Stocks Lower. Exploit This Profit Opportunity

So much for that soft inflation optimism…

A few days ago, as we looked ahead to this ‘Inflation Week,’ we noted that:

“According to real-time estimates from the Cleveland Fed, this week’s Consumer Price Index (CPI) data is expected to show a 4-basis-point decline in January’s headline inflation rate and an 11-basis-point decline in the core rate. It should be the first report since July 2024 that includes a decline in both the headline and core CPI inflation rates.” 

But today’s data certainly painted a different picture. 

The latest CPI report showed that inflation ran much hotter than expected last month, dashing hopes for more Fed rate cuts to support the U.S. economy (and the stock market). And that sour news has sent stocks spinning lower.

However, upon closer inspection, January’s hot CPI report wasn’t as bad as the headline numbers suggest. 

That’s why we think today’s inflation-driven stock selloff is a buying opportunity. 

Our Takeaway From Today’s Hot Inflation Data

Now, admittedly, the headline numbers in January’s inflation report were awful. 

Consumer prices rose 0.5% month-over-month, much hotter than the 0.3% rise expected by economists. Core consumer prices – excluding volatile food and energy prices – rose 0.4%, also higher than the anticipated 0.3% increase. 

On a year-over-year basis, the consumer price inflation rate jumped from 2.9% in December to 3.0% in January. Core consumer price inflation rose from 3.1% to 3.3%. 

It was the first month since October 2024 that both the headline and core consumer price inflation rates rose at the same time. 

In other words, it was a very ugly report. 

But we think this ugliness is temporary. 

A closer look at the CPI report’s major categories shows that conditions look favorable. Shelter, the largest contributor – which accounts for about 35% of the consumer price index – continues to drop. The second-biggest category – all commodities excluding food and shelter, which accounts for about 20% of the index – is running negative. Food – an important category with a 15% weighting – is running flat and in-line with its long-term averages. 

Across the board, inflation trends still look fine to us. Most major categories either have a positive trend (falling inflation) or are low on an absolute basis (running below their long-term average levels). 

The only major category that is experiencing rising inflation at an “above-normal” level is Transportation Services. That may well have been negatively impacted by the wildfires that raged in California last month – so we don’t think it will last.

It is also worth noting that oil prices – a major input to inflation – have been much lower so far in February than they were in January. 

Last month, oil prices averaged more than $75 per barrel. Yet throughout the first half of February, oil prices have averaged just about $72 per barrel, while other commodity prices have generally fallen, too. 

For these reasons, we think today’s hot inflation report was a one-off… 

Which makes today’s stock selloff particularly compelling.