Inflation could finally peak, with gas prices falling since mid-June. But that won’t show up in tomorrow’s morning consumer price index data, which is collected throughout the month. The CPI inflation rate is seen to reach 8.8%, although Deutsche Bank economists predict 9%. Hot inflation data will force the Federal Reserve to continue to aggressively tighten monetary policy, putting pressure on stocks.
X
The Dow Jones industrial average suffered moderate losses on Monday’s stock market, while the Nasdaq compound fell sharply. Dow futures were pointing slightly lower early Tuesday.
Details of the CPI inflation rate
The Wall Street consensus calls for a 1.1% monthly rise in the CPI, which would bring the annual inflation rate above the 8.6% reported in May. The underlying CPI, excluding food and energy prices, is expected to rise by half a percent, and the underlying inflation rate to fall from 6% to 5.8%. The underlying inflation rate of 6.5% in March was the highest since August 1982.
In past cycles, the Fed has placed more emphasis on core inflation, which may provide a better indication of underlying price pressures amid energy price volatility. However, with inflation at a four-decade high, Fed officials are concerned that expectations of high inflation will become self-reinforcing. This means that workers need to push for bigger wage increases and that companies become less reluctant when it comes to raising prices.
Inflation of commodity prices, excluding food and energy, has slowed from double-digit increases at the beginning of the year to 8.5% in May.
However, inflation in non-energy services, which affects 57% of consumer budgets, has remained on the rise, reaching a 30-year high of 5.2% in May. This includes broad categories such as rent and medical services, where price increases reflect the strong labor market more than inflationary supply disruptions. Until services inflation starts to drop significantly, the Fed will remain aggressive.
Dow Jones Rally break
The Dow Jones was down 0.4% on Monday, while the S&P 500 was down 1.15% and the Nasdaq was down 2.3%.
Markets were mixed Tuesday morning. Dow futures fell 0.7% while S&P 500 futures fell 0.5%. Nasdaq 100 futures fell less than 0.1%.
At the close on Monday, the Dow was down 15.3% from its all-time high on Jan. 4. The S&P 500 has fallen 19.6% since its closing high, while the Nasdaq has lost 29.2%.
Recently, the stock market has oscillated between the easing of a rapidly approaching recession brush, which could soon put an end to Fed rate hikes, and the concern that the Fed should remain aggressive. Sentiment is now leaning toward a prolonged period of Fed hardening, following the stronger-than-expected employment report last week.
The CME Group FedWatch page shows that markets are putting prices up with a 75 basis graffiti rate hike on July 27th. Another 50 basis point hike seems safe on September 21st.
Be sure to read IBD’s The Big Picture column after each trading day for the latest news on the current stock market trend and what it means for your trading decisions.
A warm June CPI inflation report and an expected rise in retail sales to be reported on Friday could bolster the tighter thesis for longer. But this will not solve the issue, which will ultimately be reduced to how the labor market deteriorates sharply.
ALSO AND MAY LIKE:
Best growth stocks to buy and see
Why this IBD tool simplifies the search for the best stocks
Take the next winning action with MarketSmith
Do you want to make quick profits and avoid big losses? Try SwingTrader