Market Insights: What’s Behind Recent Inflation Numbers?
In the world of finance, data is power. However, as recent events have shown, data can even be clouded by perception. The latest University of Michigan consumer inflation survey grabbed headlines with a surprising jump in one-year inflation expectations, from 2.8% in December to 3.3% in January. At first glance, this may seem like a sign of impending economic trouble. However, when you peel back the layers, a more nuanced story emerges—one rooted in politics rather than economic fundamentals.
The Politics of Inflation Perception
The survey’s results are striking when broken down by political affiliation. Take a look at the below chart from Fundstrat, one of our research partners. Respondents identifying as Democrats reported a significant rise in expected inflation, while Republicans saw inflation dropping sharply. This stark divergence reflects political sentiment more than economic reality. With a change in administration and congressional control, political bias appears to be influencing individuals’ views on the economy.
This political polarization underscores an important lesson for investors: market data doesn’t always tell the whole story. It is vital to consider the broader context when evaluating headlines or market movements.
This spike in inflation fears has driven rates higher and, therefore, our bond positions lower. Ultimately, we feel the actual data will show inflation to align with expectations, hopefully allowing rates to fall in the coming months. Short-term will continue to be volatile, but we’ll wait for the data to drive our decision-making.
What the Jobs Report Tells Us
The latest jobs report added to market jitters. The labor market came in stronger than expected, with 256,000 jobs added in December compared to the forecasted 165,000.
While a robust labor market is typically a positive indicator, some worry it could stoke inflation. However, wage growth held steady at 3.9% year-over-year—a level that does not signal runaway inflation. The Federal Reserve and other economic leaders have noted that while inflation remains a concern, there’s little evidence of wage-driven inflationary pressures. For long-term investors, this suggests that the economy is on solid footing, even if markets experience short-term turbulence.
Why Volatility Is Not Always a Bad Thing
The financial markets responded to these developments with increased volatility. The VIX, a common measure of market anxiety, rose to near 20, signaling heightened uncertainty. While this can be unsettling, it’s also a sign that markets may be nearing a bottom, with opportunities for future gains.
Historically, the first few trading days of the year often set the tone for the months ahead. Encouragingly, 2025 started positively, which could bode well for the year overall.
Key Takeaways for Investors
Context Matters: Don’t let headline numbers drive your financial decisions. Look deeper to understand what’s behind the data.
Stay Focused on the Fundamentals: Strong job growth and stable wages suggest the economy is resilient, even amid political noise.
Volatility Brings Opportunity: Market dips can create entry points for long-term investors. A disciplined, patient approach often pays off.
Have a great rest of your week!
Shean