Wall Street gets a reprieve on 2 of its biggest worries about the economy

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trader two finger pointGetty Images / Stephanie Keith

  • Two of Wall Street's biggest worries on the economy, inflation and wage growth, showed signs of moderation in February.
  • Labor Department data shows not only a subdued inflation trend but also suggests wage growth is moderating rather than picking up steam.

Diplomatic tensions with North Korea. A criminal investigation into possible conspiracy against the United States. The sudden, unexpected firing of Secretary of State Rex Tillerson.

Such massive turbulence has barely registered on the market's radar. Instead, traders are fretting over the possibility that slightly higher inflation might drive the Federal Reserve to raise interest rates more aggressively, possibly compromising the economic expansion.

Two major economic reports out Tuesday allowed investors to put their concerns into perspective: Consumer prices rose only modestly and, more importantly, median wages are actually trending lower.

It was a surprise spike in wages reported last month that sparked a large selloff in stocks that reintroduced volatility into placid financial markets, a wild ride that has since persisted.

US consumer prices rose 2.2% in the year to February while prices excluding food and energy rose just 1.8%. Fed officials target a 2% rate on another inflation measure, the personal consumption expenditures index, which has remained below the central bank's goal for much of the recovery.

A separate Labor Department report was even more instructive. It showed average hourly earnings adjusted for inflation are weakening, not strengthening - as Fed officials hope and market participants fear. Not only did earnings stagnate last month, the following chart shows just how much conditions have deteriorated in the last year - for workers across the board and for non-management employees in particular.

EarningsLabor Department

Earnings2Labor Department

The Fed has telegraphed its intention to raise interest rates three times this year. Wall Street, accustomed to the stunted optimism of recent years, shifted rapidly from not believing officials would move more than twice to suddenly pricing in the possibility of four interest rate hikes for 2018.

The latest inflation figures should, at the very least, assuage worries that the central bank will need to react more rapidly to an unexpected spike in consumer prices - and/or wages.
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