Why some analysts think markets are 'overreacting' to a hot inflation report

A big part of the monthly increase was shelter and categories typical of "start-of-the-year" upticks, but inflation will continue sliding lower.

• The market is "overreacting" to hot inflation data, analysts say, as stocks dip into the red after February's CPI report.
• While month-over-month CPI came in hotter than expected, year-over-year inflation still went down.
• A big part of the monthly increase was shelter and categories with typical "start-of-the-year" upticks, and inflation will continue sliding lower in the next few months.

A hot inflation report released Tuesday morning sent stocks tumbling. But analysts say markets need to calm down — it's not all that bad. 

After the CPI print revealed a 0.3% monthly price increase in January — above expectations of 0.2% — the S&P 500 has tanked 1.14% today, dipping below the 5000 level it smoothly sailed past last week.

But BlackRock analyst Jean Boivin says it's not all doom and gloom because a big chunk of the CPI print is housing. Without the shelter component in the report, inflation has been running below 2% for the last three months, Boivin said, including the latest release.

According to the Bureau of Labor Statistics CPI release, shelter accounted for two-thirds of the monthly increase. The shelter index, which includes rent, increased by 0.6% month-over-month.

"I think the story is still in the near term that we're going to see inflation trending down," he said in a Bloomberg interview on Tuesday. "The market is overreacting. That has been the story for the last 18 months."

Indeed, markets have been spasmodic. Most recently, after December's Fed meeting, stocks took off on a sugar-rush rally, convinced about aggressive and imminent rate hikes in 2024.

Those rate hike hopes have cooled off after a slew of strong economic data has extended the Fed's pause. And with hotter-than-expected CPI data, investors are worried about an economy that is re-accelerating, which is really not what the Fed wants right now.

Still, this CPI print is not a sign that problems are bubbling up again, JPMorgan's chief global strategist David Kelly said.

"From my perspective, all it says is, okay, the economy is cooling, it's just cooling more slowly," Kelly said in a Bloomberg interview.

CPI rose 3.1% year-over-year, which is a smaller increase compared to last month's record of a 3.4% annual increase.

"There are certain aspects of this report which push the numbers higher, but overall as this year goes on, we think the economy is going to grow more slowly, we think inflation is going to come down on a year-over-year basis," Kelly said.

He added: "We should enjoy this. This is not bad. It's just cooling more slowly."

Besides, even beyond housing, most of the categories that bumped up monthly price increases were symptoms of typical "start-of-the-year" upticks, Goldman Sachs said.

"The strength largely reflected start-of-year price increases for labor-reliant categories such as medical services, car insurance and repair, and daycare, and we assume inflation in these categories returns to the previous trend on net in February and March," analysts wrote in a note on Tuesday.