Short sellers have boosted their bets against consumer discretionary stocks, a sign that investors believe inflation is unlikely to significantly ease in the near term.

Short interest in consumer discretionary stocks listed on major US exchanges jumped to 5.59% in mid-February, up 34 basis points (bps) since the end of 2023 and the highest level of short interest in the sector since mid-September 2023, according to the latest S&P Global Market Intelligence data.

Short interest in consumer discretionary stocks has climbed as the consumer price index — the market's preferred inflation measure — increased 3.1% year over year in January. The personal consumption expenditures (PCE) index — the Federal Reserve's preferred measure — also rose 2.4%.

Excluding volatile energy and food prices, the PCE index rose 2.8%, about 80 bps above where the Fed has targeted inflation growth as part of its push to slow inflation through higher interest rates.

Short sellers may be targeting consumer discretionary stocks on the belief that inflation will remain above the Fed's 2% target and that higher prices and interest rates will eat away at consumer demand.

Short sellers have also increased their bets against consumer staples stocks since the end of 2023. Short interest in consumer staples stocks increased 63 bps to 3.97% in mid-February from 3.29% at the end of December 2023.

Meanwhile, short interest declined in financials and utilities and was flat in healthcare stocks, compared to the end of 2023.

Sector breakdown

Within the consumer discretionary sector, Volcon Inc., a Texas-based maker of electric off-road vehicles, was the most shorted. Short interest in the company was up to 57% as of mid-February from 10.2% at the end of December. The Children's Place Inc. was the second most shorted company, at 51%, up from 16.9% at the end of 2023.

Home furnishing retail was the most shorted industry within the consumer discretionary sector, with 10.2% as of mid-February, which was down from 10.3% at the end of December.