A report on August’s inflation levels caused the stock market to take a big hit today.
- Both the S&P 500 and the Dow Jones Industrial Average took a 4% plunge today.
- The drop followed the Bureau of Labor Statistics August inflation report, revealing the Consumer Price Index (CPI) at 8.3%.
- Economists had been anticipating the growth rate of this key inflation index to slow more than it did, to 8.1%.
- The drop caused a sell-off of numerous stocks that caused high-growth tech stocks like Unity Software, Cloudflare, and Carvana to lose 10% to 12% of their value, CNBC reports.
Why it’s important
CPI had dropped to 8.5% in July from 9.1% in June, and many had anticipated that the increase would slow even more, to 8.1%, so the higher number shook Mr. Market.
The slide in stocks is bad news in the short term for the market, which is only just starting to recover from recent selloffs.
“The drop erased a large chunk of the recent rally for stocks, but the S&P 500 is still up about 2% from its September 6 close of 3,908 and comfortably above its mid-June levels, when it fell below 3,700,” says CNBC.
The news also suggests that the Fed will take a much harsher approach to interest rates this month. As we previously reported, Fed Chair Jerome Powell has hinted that a third major interest rate hike is likely to further curb inflation rates but will come at the expense of the job market and possibly cause a recession.
The Fed’s goal is to reduce inflation to 2% and has said it will enact whatever restrictive policy necessary to accomplish this.
“The report is one of the last the Fed will see ahead of the Sept. 20-21 meeting, where the central bank is expected to deliver the third consecutive 0.75 point interest rate hike to tamp down inflation. The unexpectedly high August report could lead the Fed to continue its aggressive hikes longer than some investors anticipated,” says CNBC.
Backing up a bit
President Joe Biden released a statement praising the government’s strategy in fighting inflation.
“Today’s data show more progress in bringing global inflation down in the US economy. Overall, prices have been essentially flat in our country these last two months: that is welcome news for American families, with more work still to do… This month, we saw some price increases slow from the month before at the grocery store,” says WhiteHouse.gov.
As we previously reported, economists have predicted that the impact of the Inflation Reduction Act will either be negligible or slightly negative.
Other key economic indicators are trending negatively.
“The overall cost of food jumped 11.4%—the highest increase since May 1979. The cost of ‘food-at-home’ was up 13.5% year-over-year—the largest increase since March 1979. Core CPI, excluding volatile energy and food prices, increased 6.3% year-over-year and 0.6% from the month before,” says National Review.