The U.S. equity markets kicked off 2023 with strong momentum, but Tuesday’s inflation report spoiled the party. The bulls wildly celebrated in January; now it appears the Federal Reserve will take away the car keys.

The consumer price index (CPI) for January showed inflation higher than consensus expectations, with year-over-year growth only slightly lower from December. The data is weighing on stocks and sending U.S. Treasury yields higher, as fixed-income investors price in higher-for-longer rates.

After several months of optimism that consumer prices are heading inexorably lower, inflation is suddenly proving “stickier” than expected. Have we reached the peak of the 2023 rally?

During this extraordinary time of war and pandemic, the path to greater economic equilibrium will be bumpy. Perhaps the setback in the January CPI is only temporary.

However, there’s no denying it: the January CPI print is a bummer. Although there were silver linings in the report, it provides the Fed further justification to keep rates elevated longer than hoped, as reflected in rising yields this week.

Read This Story: Investors Stand at The Crossroads

Many investors (and voters) forget that inflation isn’t just an American problem. There’s a widespread misconception that U.S. inflation is the result of reckless fiscal policies, a notion that defies reality because inflation is rampant around the world.

Global stock markets also are under pressure in the wake of unexpectedly gloomy inflation reports overseas. For example, average hourly wages in the European Union recently posted an unexpected increase, prompting further inflationary worries in that region.

But there’s been some good news on the inflation front. Notably, the price of crude oil has slumped, following the U.S. Department of Energy’s announcement of another release from the strategic reserve.

The decline in crude prices has occurred despite Russia’s recent vow to curtail production by 500,000 barrels per day, effective in March. Russian President Vladimir Putin needs greater revenue to fight his war in Ukraine, but many of Putin’s autocratic goals (e.g., quickly swallowing up Ukraine) have proven impotent in the face of macro forces.

The following chart shows the sharp dip in the per-barrel price of West Texas Intermediate, which currently hovers below $80/bbl:

The falling price of oil is disinflationary, but we’ll see if the downward movement continues. The re-opening of China’s economy is a bullish trend for oil prices.

The CPI rose 0.5% in January from December, and up 6.4% from the same time a year ago. Food and shelter were the biggest drivers of inflation, with rising shelter costs accounting for about 50% of the monthly increase.

Core CPI (excluding volatile food and energy) was up 0.4% from December and 5.6% from the same period a year ago.

A few sanguine trends stand out in the January CPI print. Airfares fell for the fourth straight month; new vehicle price increases have eased; and used vehicle prices have declined seven months in a row.

In addition, the Baker Hughes rig count has been trending higher in recent weeks, which bodes well for supply. Expanding U.S. rig counts should generate higher rates of production and further declines in crude oil prices.

The January rally has lost some momentum, but that said, stocks reversed course Wednesday to end in the green. After wallowing in the red for most of the trading session, the main U.S. stock market indices bounced back and closed in positive territory, in the wake of surprisingly strong retail sales data. The indices finished the day as follows:

• DJIA: +0.28%
• S&P 500: +0.11%
• NASDAQ: +0.92%
• Russell 2000: +1.09%

All eyes are now on the producer price index (PPI), scheduled for release Thursday.

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John Persinos is the editorial director of Investing Daily.

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