Wall Street is shrugging off inflation concerns Wednesday.
The Dow ticked up slightly mid-morning after the Labor Department reported consumer prices rose 2.1% over the past year. Inflation rose more than economists had predicted.
The Federal Reserve targets 2% inflation. Investors worry that as it creeps higher, the Fed will hike interest rates more quickly than planned to tap the breaks on the economy. That would make the cost of borrowing higher, cool down growth and put a damper on corporate profits.
“Investors were looking for some hard results on inflationary data and that’s what we got today,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. Wall Street will be watching another inflation indicator, the producer price index, closely on Thursday.
Rock-bottom interest rates have driven the nine-year bull market and juiced stock prices. The Fed has signaled it will raise rates three times this year for the second year in a row.
Michael Pearce, chief U.S. economist at Capital Economics, said Wednesday that consumer prices will continue to rise in the coming months, forcing the Fed to tack on a fourth hike.
Fear about inflation initially sparked the market sell-off that began February 2, when the Labor Department reported employees’ paychecks grew faster than they had in nine years. The Dow fell by 1,000 -points twice last week.
Recent tax cuts have “complicated” the Fed’s strategy by adding more fuel to the economy, said PNC Chief Economist Gus Faucher.
The possibility of additional rate hikes showed up Wednesday in the bond market, where years of low returns have encouraged investors to put their money into stocks.
The yield on the 10-year Treasury note immediately jumped following consumer price data from 2.83% to a four-year high of 2.88%. Prices and yields move in opposite directions. If bond yields start to rise, investors may take some of their money out of the stock market and put it into safer bonds.
“If we continue to see hard evidence of inflation, 3% [yields are] not out of the cards pretty soon here,” said Ripley.