Inflation has been the specter looming behind the market correction, and just how much of a threat it truly is could become more apparent Wednesday.
Investors are avidly awaiting the government's consumer price index report, a monthly gauge that measures prices across a basket of goods deemed representative of the national marketplace.
Investors worry that if inflation continues to rise it will push the Fed into hiking rates more aggressively, raising borrowing costs, cutting into corporate profits and generally choking off the oxygen that has fueled bull runs both in stocks and bonds.
Economists surveyed by Reuters expect January headline inflation, including food and energy prices, to register a 1.9 percent annual gain, which actually would be a slight decline from the 2.1 percent in December. Core CPI is predicted to rise 1.7 percent compared with 1.8 percent the previous month.
However, the market is preparing for a surprise that could shake things up again.
"It would not surprise me at all if we saw inflation kick up a little and beat expectations," said Michael Arone, chief investment strategist at State Street Global Advisors. "This would further intensify the pressure on stocks and bonds and contribute to this idea of the inflation scare."
Jim Paulsen, chief investment strategist at Leuthold Group, has been warning that as the unemployment rate falls and wages rise, the chances also grow that inflation will become a problem.
The key level to watch won't be 2 percent, which is the Fed's goal under its dual mandate of full employment and price stability, but rather closer to 3 percent when things get interesting.
In that scenario, a declining correlation between stocks and bond yields is likely to accelerate, with the result being material damage, though not a bear market, Paulsen said.
Reference: CNBC
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