US Markets Sink on Unexpectedly High Inflation
Inflation data from the US is out and the market is stunned. The Dow Jones Industrial Average drops over 500 points, the Nasdaq 100 drops 100 points and the S&P 500 drops 200 points. What happened? The answer is simple, the US economy has been experiencing high inflation. The Fed is trying to keep inflation under control by hiking interest rates, but the numbers are troubling.
The Dow Jones Industrial Average fell over 500 points on Thursday as the Labor Department reported unexpectedly high inflation for the second consecutive month. The data was a blow to hopes that the Federal Reserve would ease interest rates to combat rising prices. The Consumer Price Index rose 9.1% in the 12 months ending June. This was well above the 8.8% increase economists expected. This has put inflation at a 40-year high.
The news comes as the economy begins a slowdown. Recent employment data indicate that the U.S. economy may not be in recession, so inflation is likely to slow. However, the Federal Reserve may not let up on aggressive rate hikes. This uncertainty is driving much of the action on Wall Street.
Inflation data released by the US Bureau of Labor Statistics showed that consumer prices rose by 0.1% in August, and are up 8.3% year over year. This number was unexpectedly high, and it prompted investors to worry about the Fed’s plans to curb inflation. The Fed has already hiked interest rates twice this year – by half a percentage point in July and three quarters in August – and is widely expected to hike rates one more time next week. This could push US interest rates to four percent in two months.
Inflation data may also impact the Nasdaq-100, which is heavily weighted towards technology stocks. Higher inflation can dampen the performance of these sectors, as investors believe that they are vulnerable to higher interest rates and inflation.
While the news was bad for the stock market, it’s not clear if it’s the cause of the current selloff. After all, stock prices rely on cash produced by companies and the willingness of investors to pay for that cash. Investors’ willingness to pay for cash is heavily influenced by the Federal Reserve’s interest rate moves. Until recently, investors were willing to invest because interest rates were so low. Now that those rates have risen, investors’ willingness to pay for cash is shrinking.
As the Federal Reserve prepares to hike rates this week, markets are worried that a rise in costs will hinder growth. Many investors are predicting that the Fed will hike its key short-term rate by three-quarters of a percent next week. However, this rate hike will not be as aggressive as many investors had hoped.
