The Dow (INDU) fell nearly 800 points on Friday afternoon after a key inflation report failed to take estimates and showed a higher-than-expected rise in the price of consumer goods.
The May consumer price index rose 8.6% year-on-year, the highest level since 1981. Economists had forecast an 8.3% increase. The underlying index, which excludes fuel and energy prices, rose 6%, slightly more than the 5.9% estimate.
These figures caused investors to falter. Already concerned about a possible economic downturn, they now fear that the Federal Reserve will recognize that inflation is ingrained in the economy and will further raise interest rates.
The central bank is expected to announce a half-percent interest rate hike next week, but could decide to raise it based on this news.
“We believe the US central bank now has good reason to surprise markets with a more aggressive rise than expected in June,” Barclays analysts wrote in a research note on Friday. We realize that it is an upcoming call and could take place in June or July. But we are changing our forecast to ask for a 75 [basis point] walk on June 15 “.
The move would be historic – the last time the Fed made a 75-point hike was in November 1994, nearly three decades ago.
Analysts appeared to be unhappy with the potential for a rise in interest rates on Friday. And while many analysts feared that the Federal Reserve would do too little and too late to curb rising inflation rates, they are also concerned that sudden sharp interest rate hikes are hurting the economy.
“The main risk to consumption, employment and the economy in general is not a slowdown in organic growth, but the extent to which extreme increases in energy and food prices could put central banks under pressure. against the rope, i [the economy could] they basically fall into a damaging political mistake, “Rick Rieder, chief investment officer of Global Fixed Income at BlackRock, wrote in a note.
The White House admitted that Friday’s inflation figure was “uncomfortably high,” further fueling investors’ fears of political action.
Historically, Federal Reserve officials have focused on personal consumption spending rather than the CPI as a preferred measure of inflation. But the basic PCE also rose by 0.34% in April and the year-on-year figure for the measure to 4.9%. This figure fell from 5.2% in March, but is still high.
“The likelihood of a recession over the next year is increasing,” Sung Won Sohn said. professor of finance and economics at Loyola Marymount University and chief economist at SS Economics. “Inflation is consuming consumers’ purchasing power.”
Consumer spending accounts for about 70% of the U.S. economy, and a real decline in that spending would be a big blow to gross domestic product. “He [Federal Reserve] he now acknowledges that he is far behind in the inflation curve and needs to act more decisively, “Sohn said.
The two-year Treasury yield rose to 3% on Friday, its highest level since 2008. The S&P 500 (SPX) and Nasdaq (COMP) indices fell about 3%.