Why are stocks down today? All the major U.S. indices are in the red after the June inflation reading, known as the Consumer Price Index (CPI), came in hotter than expected at 9.1%. This raises the likelihood that the U.S. Federal Reserve will raise its trendsetting interest rate by 75 basis points (three quarters of one percentage point) or more when it next meets on July 26 and 27. The Dow Jones Industrial Average, S&P 500 and Nasdaq indexes are each down more than 1% following the June inflation data release.
For the year, both the S&P 500 and Nasdaq are in a bear market, defined as a decline of 20% or more from recent highs. The Dow Jones is down 16% year-to-date.
Why Are Stocks Down Today?
The U.S. Bureau of Labor Statistics reported that CPI, which measures the costs of goods and services, rose 9.1% from a year ago in June. That was higher than the consensus expectation of economists who were calling for 8.8% annualized inflation growth. It also marks the fastest pace for inflation since December 1981. Excluding volatile food and energy prices, core CPI gained 5.9% in June from a year ago, higher than the 5.7% growth that was widely expected. If there’s a silver lining to be found in the latest data, it is that core inflation peaked at 6.5% this past March and has been falling in recent months.
However, energy prices surged 7.5% between May and June and rose 42% when compared to June 2021. The food index in the U.S. increased 1% in June from May, while costs for shelter rose 0.6% during the month. June marked the sixth consecutive month that food and home costs rose at least 1% on a month-over-month basis.
Much of the inflation increase came from gasoline prices that consumers pay at the pump, which rose 11.2% during the month and were up nearly 60% from a year ago. President Joe Biden is in the Middle East today for talks aimed at helping to increase oil flows and bring down the cost of gasoline prices for consumers. Airline fares were one of the few costs that declined for Americans in June, with prices falling 1.8% from May of this year.
Why It Matters
June’s stronger than expected inflation reading bolsters the chances that the U.S. Federal Reserve will maintain its aggressive monetary policy tightening in the weeks and months ahead. The central bank is widely expected to lift interest rates by 75 basis points at its July meeting, following a similar rate increase in June. The Federal Reserve is trying to dampen inflation before it becomes entrenched in wages and prices, making it hard to control.
There are growing concerns that the sharp rise in interest rates could push the U.S. economy into a recession later this year or in 2023. However, some economists claim the economy is already in a technical recession, defined as two successive quarters of negative economic growth.
The Fed is not the only central bank that is raising interest rates in an effort to reign in inflation and cool off overheated consumer prices. In neighboring Canada, the central bank surprised markets today by raising interest rates by a full percentage point, the biggest one-time rate hike since 1998. It also lifted its key lending rate to 2.5%. Economists and markets were expecting The Bank of Canada to follow the U.S. Federal Reserve’s lead and lift rates by 75 basis points. Canada’s latest inflation reading came in at 7.7%, a 40-year high in the country.
What’s Next
Investors are reacting negatively to the latest inflation reading in the U.S., which suggests that consumer prices have not yet peaked and are not coming down. The latest data all but assures that interest rates will continue to rise this year as the Federal Reserve struggles to get inflation under control. That will make it more expensive for businesses and consumers to borrow money, whether it be to finance the purchase of a home or the operations of a fast growing startup. Until there is clear evidence that inflation is coming down, markets will likely remain volatile.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
