December 11, 2023

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CPI inflation fell, but hot core prices rocked the Fed and Dow Jones

CPI inflation fell, but hot core prices rocked the Fed and Dow Jones

CPI inflation continued to ease from its 40-year peak in August, but less than expected. cOre inflation, which deprives food and energy prices, unexpectedly accelerated from July’s pace. After the CPI report, which forced a significant hike in the Federal Reserve next week, the Dow Jones Industrial Average turned sharply lower early Tuesday. stock market work.


CPI inflation eased to 8.3%, down from 8.5% in July and 9.1% in June, amid falling gas prices. The CPI rose 0.1% during the month. But Wall Street economists expected the CPI to show a monthly decline of 0.1%, bringing the CPI inflation rate down to 8%.

Core CPI rose 0.6% from July. Economists had expected the monthly increase to match July’s 0.3% rise. The annual core inflation rate rose to 6.3 percent from 5.9 percent in July. Core inflation of 6.5% in March was the highest since August 1982.

A hotter than expected reading of core inflation will keep pressure on the Fed to raise its key interest rate by 75 basis points for the third meeting in a row. Even worse for the Dow and the broader stock market, Wall Street is now pricing in a hike in the Fed’s key interest rate to the 4%-4.25% range by the end of 2022. Prior to the CPI report, markets had been expecting a Fed rate Peak at 3.75%-4%. Now, chances are almost there that the Fed may raise its target range to 4.25%-4.5% in 2023.

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Inflation in commodity prices, excluding food and energy, slowed from double-digit increases earlier in the year. But that progress paused in August. Commodity prices rose 0.5% in the month and 7.1% from a year ago, up from 7% in July.

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Inflation in prices for non-energy services, which affects 56% of consumers’ budgets, has not yet subsided, rising 0.6% in the month and 6.1% from a year ago, compared to 5.5% in July. The annual increase was the highest since February 1991.

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Until inflation begins to subside for this category of spending, which includes rent, medical services, transportation and education, the Fed may not be convinced that inflation pressures are abating. That’s because price increases for these services are closely linked to a tight labor market and high wage growth. If wages do not rise more than 5%, large increases in prices will harm demand and balance markets.

The August jobs report It saw some improvement in labor force participation, raising the unemployment rate to 3.7%, despite strong job growth. More of the same could begin to ease wage pressures, but for now, the labor market remains too tight for the Fed.

Dow Jones’ reaction to the CPI report

Early Tuesday, the Dow was down 1.8%. The S&P 500 was down 2.4% and the Nasdaq Composite was down 3.2%.

Stocks were trying to counteract the fallout after Fed Chairman Powell’s August 26 speech in Jackson Hole, U.S. Powell’s terse remarks focused on the Fed’s mistakes from the 1970s, which fueled double-digit inflation. He indicated that policy makers will keep interest rates higher for a longer period to avoid a recurrence, which casts doubt on the pivot of interest rate cuts in 2023.

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The 10-year Treasury yield, which closed near a 3-month high of 3.36% on Monday, rose 6 basis points to 3.42%. That closes at an 11-year high of 3.48% set on June 14.

CPI Inflation Report Details

Prices of used cars and trucks decreased 0.1% during the month. But new car prices are up 0.8% from July and 10.1% from a year ago.

Energy prices fell 5% during the month, but increased 23.8% from a year ago.

Food prices outside the home rose 0.9% in August and 8% from a year ago. Prices of food consumed at home increased 0.7% last month and 13.5% over the past year.

The rent index rose 0.7%, as was the owner’s equivalent rent. The annual increases of 6.3% and 6.6% each are the largest since 1986.

Transfer rates are up 0.5% in the month and 11.3% from a year ago. Prices for medical services are up 0.8% from July and 5.6% from August 2021.

The Fed focused on core inflation

“Core inflation is the best indicator of inflation,” Fed Chairman Jerome Powell said at his press conference on July 27.

In previous months, when oil and gas prices were rising, the Federal Reserve focused on headline inflation. But now that gas prices are down, the Fed’s tone has changed. Base prices are the focus again, and they are back to normal.

Powell explained that usually policy makers can consider a short-term jump in the prices of commodities such as oil. But inflation has been very high for a very long time, so there is an increased risk that households will start to expect higher inflation in the future. This can lead to behavioral shifts, such as more aggressive bargaining for higher wages and more spending – before prices go up further.

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In other words, general inflation only matters when it has been bad for an extended period, such as in the first half of 2022. So if oil prices start to rise again, the focus may shift again.

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