What's going on?

According to data released on Friday, prices in the US rose more quickly in December than in previous months � which could mark a notable shift in one of the most important factors affecting the value of investments: inflation.

What does this mean?

Prices of consumer goods in the US, excluding volatile items like fuel and food prices (which are often left out in order to properly reflect the true, underlying rate of change), rose in December at the fastest pace in almost a year. This is important because inflation was, for much of 2017, remarkably low given that economic growth improved. Usually, a quickening economy should allow businesses to raise prices faster � which might now be starting to happen.

Why should I care?

For markets: Rising inflation �is bad for bonds � and possibly stocks.

If inflation is indeed increasing in the US � and, importantly, if inflation increases in other major economies too � investors will almost certainly start making significant adjustments. For one, inflation is bad for bonds because the future, predetermined cash payments that they promise their owners are worth less (that cash will buy fewer goods and services). Thus, higher inflation tends to push down the price of bonds. Inflation�s impact on stocks is less obvious, but stock prices are, to some extent, influenced by bond prices (e.g. if bonds are overvalued, investors are more likely to find stocks relatively attractive). Therefore falling bond prices can drag stock prices down with them.


The bigger picture: There are, however, various signs that inflation is not climbing.

Earlier last week, separate data suggested that the prices of products made in America didn�t rise in December as much as economists expected. Also, inflation in the eurozone in December remained stuck at its historically low level. So while it�s certainly important to note Friday�s data, it�s more of a potential early warning sign than the definite beginning of a new trend for inflation.