Stocks plunged on Tuesday as fears that the Federal Reserve will ultimately spark a recession spread like wildfire after a hotter-than-expected inflation print.
The Fed has raised interest rates four times this year in an attempt to cool rising consumer prices, with Fed Chair Jerome Powell saying that his inflation fight is “unconditional” and rate hikes will continue even if it means some “pain” for Americans.
But despite Powell’s efforts, inflation, as measured by the Consumer Price Index (CPI), rose by 0.1% in August, and 8.3% compared to the same period a year ago, the Bureau of Labor Statistics revealed on Tuesday.
The Dow Jones Industrial Average fell over 1100 points (or 3.53%) to 31,251 after the inflation data went public, as experts were quick to sound the alarm about the rising potential for a Fed-induced recession.
“The Fed has the worst problem in the world,” Chris Zaccarelli, Independent Advisor Alliance’s chief investment officer, told Fortune, arguing that the central bank will be forced to continue raising rates and shrinking its balance sheet even as the economy slows, which will bring a distinct rise in unemployment.
“It’s a political problem, not an economic problem—and the only cure for the current crisis is one that is politically infeasible,” he said. “If the Fed thought they were criticized too much by the previous administration, and they were, wait until they see the type of criticism they will be under as they deliberately create an economic scenario where unemployment jumps significantly.”
Zaccarelli sounded worried about what comes next: “Not only are they going to end up causing a recession, but it is going to be a bad one.”
He isn’t the only economic expert warning Americans about the coming Fed-induced “pain.”
ZipRecruiter’s lead economist, Sinem Buber, told Fortune that the rise in core inflation in August, which excludes volatile food and energy prices, was a worrying sign.
“The real action in the report—the focus of the Fed’s attention, and the figure most synonymous with future inflation—is core inflation. And that delivered a shock, rising 0.6% in August to 6.3% over the year,” she said. “That suggests the Fed may have to hold rates higher for longer to tame inflation, with greater pain for the housing market and labor market along the way.”
The rise in core inflation, in particular, likely puts the Fed’s goal of a “soft landing”—where inflation is controlled without sparking a recession—out of reach, according to EY-Parthenon’s chief economist Gregory Daco.
“Inflation remains broad-based, and the sequential momentum for core CPI portends to only a very gradual easing of inflationary dynamics,” Daco told Fortune. “In the context of this global central bank tightening cycle, higher and more persistent inflationary pressures increase the risk of a hard landing.”
And for investors, the hot inflation reading means stocks will continue to face pressure as rising rates increase the cost of borrowing and lower market valuations.
“Unfortunately for markets, this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future,” Cliff Hodge, chief investment officer for Cornerstone Wealth, told Fortune.
Of course, the latest CPI report wasn’t all bad. Overall energy prices dipped 5% in August, owing to a 10.6% monthly drop in gasoline prices. And used car prices also fell 0.1% last month, after surging throughout the pandemic.
However, taken as a whole, the latest inflation report wasn’t what Wall Street was hoping for. Some 70% of the categories that make up the consumer price index saw annual price increases of more than 4% month over month in August. And although gas prices have dropped sharply since June, experts say energy price relief may not last.
Jeffrey Roach, LPL Financial’s chief economist, told Fortune that he fears rising electricity and natural gas prices this winter will end up erasing much of the savings Americans earned from falling gas prices in recent weeks.
Roach also argued that rising food costs are a “growing concern.” Food prices rose 11.4% from a year ago in August, the largest year-over-year jump since 1979.
“Inflation pressures are especially hurting lower-income households who spend a greater percentage of income on food,” Roach noted.
While rising prices at the grocery store are worrying economists, their main concern seems to be shelter inflation. Overall shelter prices rose 0.7% in August, and 6.2% year over year.
While that may not seem like a lot, it’s a critical statistic, because shelter prices make up over 32% of the consumer price index, of which roughly 8% is rent prices and some 24% is owner’s equivalent rent (OER)—which is determined by a monthly survey that asks consumers who own a primary residence how much they would pay to rent instead of own their home.
Liz Ann Sonders, the chief investment strategist at Charles Schwab, noted in a Tuesday tweet that the OER portion of August’s CPI reading showed a 6.3% year-over-year jump. That’s the fastest increase since April 1986.
“The housing sector is critical as it represents almost a third of total CPI and is likely to be a consistent contributor to inflation, as rents are sticky and are slowly reflected in CPI through surveys that have significant lags in reporting,” Jay Hatfield, the CIO of Infrastructure Capital Advisors, told Fortune.
However, Hatfield argues the Fed’s policies of raising interest rates and shrinking its balance sheet, thereby reducing the money supply, will eventually work to control inflation.
“We continue to be optimistic that inflation will steadily decline over the next six months as the Fed’s 15% reduction in the money supply produces a very strong dollar and slows the housing sector through dramatically higher mortgage rates,” Hatfield said.
Bank of America economists, led by chief U.S. economist Michael Gapen, aren’t as optimistic about the timing, arguing that true price stability won’t come until 2024 in a Tuesday research note. And, like most of their peers, the BofA team are also concerned about the rising possibility of a “hard landing” for the U.S. economy.
“Altogether, the solid reading on core CPI and core goods prices, in particular, suggests that underlying price pressures remain firm and, in our view, suggests the Fed’s work is only just beginning,” they wrote. “Solid employment gains alongside firm core inflation readings point to additional monetary policy tightening and hard landing risks.”
This story was originally featured on Fortune.com
Tuesday’s August consumer-price index report, which showed “very stubborn” pressure remaining in the gauge which excludes food and energy, “is a game changer in terms of Fed expectations,” Jefferies economists Aneta Markowska and Thomas Simons said in a note. They said a 4% terminal fed funds rate, the level at which the Fed is seen as ending its rate-hike campaign, “won’t be high enough.” The economists said that the messaging from Fed policy makers “is likely to shift very quickly from a 4% te
‘It masked the full perception.’ Falling gas prices may have skewed expectations for August inflation numbers
Investors got a rude awakening with Thursday’s hotter-than-expected inflation numbers, and the decline in gas prices since June may have contributed to their sense of shock. Markets plummeted after the release of August inflation data, in part because dropping gas prices over the past few months may have lulled people into thinking inflation was cooling faster than it was. It was another reminder of the psychological sway gas prices hold over consumers and investors alike.
In a research note published following a hotter-than-expected U.S. August Consumer Price Index report, the investment bank also said it was raising its forecast for the terminal rate by 50 basis points to 4.50%-4.75% by February 2023. The Federal Reserve will release its policy decision at the close of its two-day meeting next week, on Sept. 20-21.
(Bloomberg) — Rates traders are now betting the Federal Reserve will lift its benchmark rate by at least three-quarters of a percentage point next week, with some chatter that the increase might need to be even bigger than that after consumer-price inflation data came in hotter than expected.Most Read from BloombergUS Inflation Tops Forecasts, Cementing Odds of Big Fed HikeThe World’s Hottest Housing Markets Are Facing a Painful ResetStocks Plumb Day’s Lows as Yields Surge Post-CPI: Markets Wra
(Bloomberg) — Economists weren’t the only ones caught off-guard by Tuesday’s hotter-than-expected inflation reading: A day earlier, investors were piling into the world’s biggest tech ETF at the fastest rate since February.Most Read from BloombergUS Inflation Tops Forecasts, Cementing Odds of Big Fed HikeThe World’s Hottest Housing Markets Are Facing a Painful ResetStocks Plumb Day’s Lows as Yields Surge Post-CPI: Markets WrapUkrainian Successes Raise Russian Collapse to Realm of PossibilityHed
(Bloomberg) — US stocks fell in a broad-based selloff and Treasury yields spiked higher after hotter-than-expected inflation data fueled bets on a jumbo hike by the Federal Reserve next week.Most Read from BloombergUS Inflation Tops Forecasts, Cementing Odds of Big Fed HikeThe World’s Hottest Housing Markets Are Facing a Painful ResetStocks Plumb Day’s Lows as Yields Surge Post-CPI: Markets WrapUkrainian Successes Raise Russian Collapse to Realm of PossibilityHedge Fund’s Decade-Long Wait for Y
Stepping into retirement is a lifestyle-changer for U.S. career professionals. Make that transition more seamless by avoiding these financial land mines.
‘Every month I express my concerns to my adviser, but he says not to worry.’ My 401(k) has lost over 20% and I can’t afford to lose that kind of money. Is it time to find a new adviser?
Answer: In general, a 20% loss for someone retiring in a year suggests the account may be invested too aggressively, says certified financial planner Daniel P. Forbes of Forbes Financial Planning, Inc. That said, certified financial planner Grace Yung of Midtown Financial points out that this is a midterm election year and historically, midterm election years are volatile due to uncertainty. Have a question about dealing with your financial planner or looking to hire a new one? The first thing would be to have a serious conversation with your current adviser because it seems your investment portfolio may be too aggressive for your willingness to ride out the market’s ups and downs.
An oversold bounce over the past four days helped to create the expectation that the CPI report would come in lower than expected. The fall in oil and gas helped to fuel the positive expectation. Market expectations proved to be dead wrong as CPI came in substantially higher than expected.
Ford Motor (NYSE: F) stock sank 4.2% within minutes of the market’s opening Tuesday, reversing its gains from the previous day as the markets digested the latest inflation data and tried to make sense of what it could mean for the economy and automotive companies that are highly sensitive to inflation and interest rates. The S&P 500 plunged today after the August Consumer Price Index (CPI) unexpectedly rose 0.1% versus July, despite a fall in gasoline prices. Also, although inflation dropped year over year in August, it still remains sky-high at 8.3%, significantly overshooting the Federal Reserve’s annual target inflation of 2%.
(Bloomberg) — Nintendo Co.’s family-friendly online shooter game Splatoon 3 became the biggest Switch debut to date with 3.45 million units sold in Japan over its opening weekend.Most Read from BloombergUS Inflation Tops Forecasts, Cementing Odds of Big Fed HikeThe World’s Hottest Housing Markets Are Facing a Painful ResetStocks Plumb Day’s Lows as Yields Surge Post-CPI: Markets WrapUkrainian Successes Raise Russian Collapse to Realm of PossibilityHedge Fund’s Decade-Long Wait for Yuan Crash Ne