Is This Fear Holding the Dow Back This Morning?

On a morning on which the National Association of Home Builders announced extremely favorable conditions for the housing industry, as well as rising industrial production figures, you'd expect the stock market to be primed to continue its run-up toward ever-higher record levels. Yet as of 10:45 a.m. EDT, the Dow Jones Industrials (DJINDICES: ^DJI  ) are actually down four points, and the most likely culprit for the drop is the latest news on the Consumer Price Index.

Why the CPI rose sharply today
The Bureau of Labor Statistics reported that overall, prices rose 0.5% during the month of June. That marked the biggest increase since February, and it represents another data point suggesting that low interest rates could finally be starting to show up in rising prices at the retail level.

However, looking more deeply at the numbers once again reveals the huge influence that rising energy prices have had on the CPI. Energy prices rose 3.4% during the month, with gasoline prices jumping more than 6%. Yet both Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) are trading lower today despite rising oil prices, showing that even energy stocks don't always benefit from inflationary pressure, because higher prices spur oil consumers to reduce their consumption. When you take out the volatile food and energy segments, core CPI rose just 0.2%, adding up to a 1.6% gain over the past year. That level is low enough to give the Federal Reserve latitude to maintain its accommodative monetary policies a bit longer.

Investors saw the impact of the inflation numbers on the price of inflation-indexed bonds. The iShares Barclays TIPS Bond ETF (NYSEMKT: TIP  ) has risen 0.3% on the day. Treasury Inflation-Protected Securities, or TIPS, benefit from the rising CPI, as the bonds see their face value at maturity rise to reflect increasing price levels.

Is inflation that important?
Yet another fear that's keeping the Dow back has to do with earnings reports. Coca-Cola (NYSE: KO  ) has fallen more than 2% this morning after it reported disappointing revenue figures for its second quarter. The company reported sales volume growth of just 1%, pointing to weakness in economies just about everywhere outside North America and adverse weather patterns that led to fewer soft-drink purchases. The strength of the dollar versus foreign currencies also held earnings back, and falling sales volumes in North America pose a threat to its continued growth. Given the weakness in demand, Coke would be hard-pressed to pass on higher costs to its customers if inflation were to flare up again.

For now, inflation doesn't seem to be an imminent threat to the stock market or the U.S. economy. So long as the core CPI doesn't reflect companies passing through higher energy costs to consumers, then the Dow shouldn't have to worry about inflation as a lasting obstacle to further record highs.

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9/23/2016 4:55 PM
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TIP $116.22 Up +0.32 +0.28%
iShares Barclays T… CAPS Rating: *
XOM $83.45 Down -0.09 -0.11%
ExxonMobil CAPS Rating: ****