'Probability Of Stagflation Is Increasing': Experts React To 8.5% CPI Inflation, Highest Since 1981

The SPDR S&P 500 ETF Trust SPY SPY traded higher by 0.9% on Tuesday morning after the Labor Department reported an 8.5% increase in the consumer price index in the month of March, the highest inflation growth since 1981.

What Happened: The headline CPI rose 8.6% in March, above economist estimates of 8.4% and marking the highest growth rate since December 1981. The CPI was up 1.2% on a monthly basis.

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Core inflation, which excludes volatile food and energy prices, was up 6.5% in March, in-line with economist estimates.

Food prices were up 1% month-over-month and 8.8% compared to a year ago. Energy prices were up 11% in March and 32% over the past 12 months. Used car prices dropped 3.8% on a monthly basis but remain up 35.3% from a year ago.

The latest CPI inflation reading comes after the Labor Department reported earlier this month that U.S. wages grew 5.6% year-over-year in March. Unfortunately, the latest inflation numbers suggest prices are rising faster than wages for many Americans.

Voices From The Street: Jeffrey Roach, chief economist at LPL Financial, said inflation will likely soon peak, but the cool-down period could be long and painful.

"Look at rents, food and autos to lead the way in releasing inflation pressures in the remaining months of 2022," Roach said.

John Lynch, chief investment officer at Comerica Wealth Management, said first-quarter earnings calls will be important for investors to get a sense of how much of impact inflation is having on U.S. companies.

"Two primary tailwinds for stocks these past few years, the Fed and low CPI, are now headwinds that will pressure margins and valuations," Lynch said.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said the silver lining to today's report is that core inflation has moderated somewhat.

"Given that the Fed is more likely to pay attention to the Core number, today’s report could be short-term good news for the stock and bond markets," Zaccarelli said.

Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund IVOL, said the "probability of stagflation is increasing" as the Fed begins to raise interest rates in such a highly inflationary environment.

"Inflation is largely being driven by supply chain issues and rate hikes are unlikely to smooth the supply chain," Davis said.