Hopes that the Federal Reserve can engineer a soft landing for the U.S. economy took a hit on Tuesday when a key measure of inflation beat forecasts, sparking a sharp sell-off on Wall Street.
The consumer price index rose 0.1% in August, beating economists’ expectations of a 0.1% decline. Of greatest concern to policymakers is core inflation, which excludes volatile commodities such as energy and food, rose 6.3% for the year, up 0.6%, compared with 5.9% recorded in July. That’s what I did.
Figures from the Bureau of Labor Statistics put an end to a brief respite for Fed officials after July readings showed prices were not rising compared to the previous month.
Wall Street was caught off guard by higher-than-expected inflation. The S&P 500 fell 4.3% for him, its worst performance since June 2020. The Nasdaq Composite, piling on tech companies more sensitive to changes in interest rate expectations, closed down more than 5% on Tuesday.
In the Treasury market, the more sensitive two-year US Treasury yield jumped about 0.2 percentage points to 3.75% from trading at 3.52% prior to the release of inflation data.
The chances of the Fed choosing a full 1-point rate hike in September have risen to about 30% from 0% earlier in the week, according to CME Group. Most economists are forecasting another 0.75 percentage point rate hike, which would raise the Federal Funds rate to a new target range of 3% to 3.25%.
Steven Blitz, U.S. chief economist at TS Lombard, said Tuesday’s data combined with rising wages and a tight labor market meant the Fed was “not going to create a soft-landing fairy tale.” added to
“We don’t see anything that the Fed wants to slow the pace of rate hikes this month,” said Brian Coulton, chief economist at Fitch Ratings.
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U.S. President Joe Biden and his economic advisers also wanted headline numbers cut, until they scheduled a “celebration” of his recently passed inflation-cutting bill, a package of health care and climate policies. .
An event held on Tuesday was set to promote the passage of the bill, but Republican opponents of Biden quickly caught the optics.
Minority Senate Majority Leader Mitch McConnell wrote on Twitter: “Hours after this horrifying inflation report, the White House is hosting a ‘Inflation Control’ celebration.” “The Democrats have bankrupted our economy and now they are partying while families pay. They couldn’t look more contactless if they tried.”
Inflation has soared even as petrol prices have fallen in recent months. Earlier this summer, it hit a record high of $5 per gallon, following a surge in oil prices after Russia’s invasion of Ukraine. The current national average is $3.70 for him, according to the American Automobile Association.
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In recent weeks, Fed policymakers have reaffirmed their commitment to keeping inflation under control and warned of the risks associated with allowing price pressures to persist.
An inability to bring inflation down and allowing expectations of future price increases to skyrocket would likely mean economic pain afterwards, Chairman Jay Powell and Vice Chairman Lael Brainard said last week. Stated.
Policy makers fear the downward trend in gasoline prices is unsustainable, especially if energy prices spike later this year. It warned of the possibility over the weekend, citing concerns over widespread shortages across Europe as it halted.
