The U.S. Labor Department reported that January annual inflation came in at 7.5% which was above expectations of 7.2%. Prices rose by 0.6% on a monthly basis, exceeding consensus expectations of 0.5%. These figures were above all expectations, causing stocks to move lower and short-term yields to spike higher. This report was hotly anticipated by the market as a continually accelerating Consumer Price Index (CPI) likely means that the Federal Reserve will err on the hawkish side, while a decelerating CPI means the Fed has more room to operate.

These fears were later confirmed by St. Louis Fed President James Bullard who expressed his support for a 50 basis points rate hike while also opening up the possibility of an inter-meeting rate hike. Up to Bullard's comments, stocks had been firming up but this attempt was quickly aborted once traders absorbed that up to 7 rate hikes are now likely in 2022. Yields on government bonds also climbed higher with the 10-Year getting above 2% which is its highest level since August 2019.

Core inflation which is the Fed's preferred measure of inflation also topped expectations at 6% vs 5.9% on an annual basis and 0.6% vs 0.4% on a monthly basis. These were the highest levels of inflation since August 1982.

It's a tough environment for investors as the growth surge in 2021 is expected to sharply decelerate with fiscal stimulus fading. At the same time, inflation is elevated, while the Fed looks to tighten policy. Historically, a slowing economy and tightening Fed have been a dangerous combination for stocks.

Used cars continue to be a major factor in inflation with a 1.5% monthly gain and overall 40.5% surge over the last year. Shelter costs increased 0.3% on the month and are up 4.4%. Unlike energy or vehicle prices, shelter costs tend to be stickier like insurance costs and wages which are also contributing to inflation.

Of course, there is going to be some sort of easing in inflationary pressures as supply chain pressures improve and transportation bottlenecks ease. In recent earnings reports, a common theme is companies saying that supply chain issues will remain a challenge in 2023 but the situation is already improving and going to improve even more over the next few months. The 'transitory' inflation has always been centered on this, but the issue has been various waves of the coronavirus have led to negative ripple effects that exacerbate an already bad situation. Another reason that inflation could slow is the combination of the Fed's hawkish stance and a slowing of the economy which would quickly deflate asset prices.