Dow Jones Dives 700 Points On Hot Inflation Report
The consumer price index, which excludes volatile food and energy prices, rose 6.0% in the year through August. This is the highest rate in over four months. The report will be closely watched by policy makers, and a rise in core inflation will likely influence the Federal Reserve’s interest rate decision.
The news is a blow for American consumers, who already are suffering from rising food and energy prices. While gas prices have dropped in recent months, food prices are continuing to spike. In addition, a railroad strike could disrupt domestic supply chains, and the world economy is slowing. Meanwhile, European sanctions could force millions of barrels of Russian oil off the global market.
The consumer price index (CPI) was released on Wednesday and showed that prices were warming up more than expected, although the figures were not as hot as expected. Core consumer prices rose 0.6% from March. With the news, the stock market immediately retreated. The S&P 500 and Nasdaq fell below their recent lows and closed at their lowest levels of the day. The Dow Jones and Nasdaq are now at their worst levels since January. Meanwhile, the small-cap Russell 2000 fell 2.5%.
A sustained slowdown in price increases is necessary to convince the central bank that its policy measures are working and can move the economy back into a healthy environment. Officials have pledged to raise interest rates in the near future, but that can limit consumer demand, stifling hiring and wage growth.
As the Fed prepares to raise interest rates next week, it’s important to keep inflation under control. Next week, officials are widely expected to increase rates by three-quarters of a percent. The Fed has said it hopes to gradually reduce the rate hikes after a few months, but the timing depends on incoming data. However, following today’s data, investors began penciling in the possibility of an even higher rate hike. As a result, stock prices dropped and the yield curve inverted. The two-year Treasury yield jumped to 3.16%, while the ten-year Treasury yield rose to nearly 3%.
This report may influence inflation data, as fuel prices are expected to rise this winter. Natural gas, which is the most common fuel used for heating homes, is expected to rise more than 25 percent from last year. This will push the cost of heating a home with natural gas up to $952 in six months.
Rent-related costs make up nearly a third of overall inflation. They continued their steep climb in August, and economists expect housing costs to continue rising at a rapid pace. Lack of available apartments and rising mortgage rates have made it hard for automakers to keep up with demand. Ultimately, this means that rents are likely to continue to rise, but it’s unclear whether these factors will have a long term impact on inflation.
