Wall Street Needs To Brace For An Even Bigger Inflation Scare

Wall Street is worried about inflation.

The anticipated January consumer-price index report, released Wednesday, didn't help calm those concerns. It showed the basket of consumer goods increased 2.1% year-on-year, more than economists had forecast.

Inflation concerns intensified after the January jobs report showed the largest increase in average hourly earnings since 2008. This helped drive the stock market into a correction, as investors realized the era of low interest rates — a key catalyst for the bull market — could be fading away for good.

But an even bigger shock could emerge in April and May, when the reports for the preceding months are released. In April, year-over-year inflation would face what economists describe as an adverse base effect: because last year was unusually low, the rate of change could be larger than normal.

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"I currently spend significant amounts of time on the phone, emails, and in meetings explaining this coming jump in the March and April inflation data, and I have come to the conclusion that this is not priced in to rates at all," said Torsten Sløk, the chief international economist at Deutsche Bank, in a note on Monday.

Blame cellphones and physicians

Inflation could rise even more in the coming months mainly because of two components that cheapened significantly a year ago: cellphone plans and medical services.

Inflation started to fall early in 2017, defying many economists' expectations it would instead move closer to the Federal Reserve's 2% target. This was puzzling, since the textbook said prices should have been rising in a tight labor market and low unemployment environment.

The cost of cellphone plans and medical services were eventually blamed.

Spearheaded by T-Mobile, the telecoms giants were engaged in a years-long price war that eventually forced all of them to offer customers cheap, unlimited data plans.

postload-img data-src="https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-750-500.jpg" data-sizes="(min-width: 960px) and (max-width: 1259px) 640px, (min-width: 1260px) 960px, (-webkit-min-device-pixel-ratio: 2) 50vw, 100vw" data-srcset="https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-160-107.jpg 160w, https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-320-213.jpg 320w, https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-480-320.jpg 480w, https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-640-427.jpg 640w, https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-750-500.jpg 750w, https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-960-640.jpg 960w, https://amp.businessinsider.com/images/5a844a3dd030721c008b46c0-1136-757.jpg 1136w" data-alt="telecom pce price level"">> Andy Kiersz/Business Insider

And so, the drop in wireless service costs dragged the monthly change in the core personal consumption expenditures index, which strips out volatile food and energy costs and is the Fed's preferred way to measure inflation.

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Wall Street Needs To Brace For An Even Bigger Inflation Scare

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