Stocks plunged on Friday after new government data showed inflation in May jumped 8.6% from a year agothe strongest rise in consumer prices since 1981.
The S&P 500 fell 117 points, or 2.9%, to 3,901. The Dow Jones Industrial Average fell 2.7% and the tech-heavy Nasdaq fell 3.5%. The sharp drop marks the eighth week of losses in the past nine weeks for U.S. benchmarks.
“Selling was very broad on Friday, but financials, technology and travel/leisure saw some of the steepest declines,” Vital Knowledge analyst Adam Crisafulli said in a report. “Travel/leisure names were hit very hard on Thursday and Friday as investors took profits in this group as demand began to falter given huge price increases and growing pressures on gas and gas budgets. food.”
The jump in the Consumer price index, a broad basket of goods and services, was driven primarily by higher fuel, food and housing prices, the Labor Department reported Friday. The record increase dashed investors’ hopes of easing inflation, replacing them with stagflation fears that central banks continue to raise interest rates in an effort to contain inflation.
The US Federal Reserve meets for two days next week, and most economists and analysts expect the central bank to raise its main borrowing rate by an additional half a point. While the Fed no longer uses CPI data to frame its policy, analysts say the higher-than-expected inflation numbers argue for further rate hikes.
“This report influences the outlook for monetary policy in September and beyond,” Comerica Bank chief economist Bill Adams said in an email to clients. “The persistence of high inflation in May strengthens the case for further rate hikes of half a percentage point after July and weakens the case for a pause in hikes in September.”
The aggressive rate hikes are part of a growing global wave where central banks are scrapping ultra-low interest rates that have supported borrowing, economic growth and stock prices during the pandemic and have also flooded markets with investments in search of higher returns. Now central banks are focusing on slowing growth to stifle high inflation for four decades.
The risk is that such moves could cause a recession if they are too aggressive. And higher interest rates tend to pull stock prices down.
A major driver of inflation is higher gas prices, which have tightened pressure on businesses and households, increasing pressure on budgets. Crude oil prices are up about 60% for the year. Much of the jump is due to The Russian invasion of Ukraine.
Early Friday, the AAA automobile club reported that the national average for a gallon of regular gasoline in the United States had reached $4.99. In California, the average price per gallon is $6.42, according to AAA estimates.
Benchmark U.S. crude oil gained 82 cents to $122.33 a barrel in electronic trading on the New York Mercantile Exchange. It fell 60 cents to $121.51 on Thursday.
Brent crude oil, the price standard for international trade, added $1 to $124.07 a barrel.
Haircut Tracker
While consumer spending grew at an annual rate of 3.1% from January to March, that trend may soon reverse as soaring prices continue to strain U.S. households, economists said.
“Rising gasoline prices and high inflation are also weighing on consumers,” said John Leer, chief economist at Morning Consult. “To date, consumer pessimism has not led to a pullback in consumer spending, but high prices are eating away at consumer savings, which could be the catalyst for a real contraction in real consumer spending.”
Another telltale signal, noted Comerica’s Adams, is the cost of haircuts, which rose 0.5% in May and more than 6% this year.
“Economists watch this price closely because a haircut is largely the same service today as it was 10, 20 or 50 years ago, and is similar in all countries,” he explained. . This makes it useful for measuring inflation.
“Consistent with the rest of the report, this shows that inflation failed to moderate in May and is far too high,” Adams said.
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