Highlights:
- S&P 500 falls 4.34%, Nasdaq closes down 5.48%.
- US August CPI Increased 8.3% From Year Earlier.
- Shelter, Food, and Healthcare account for Increase in Core CPI.
The S&P 500 suffered its worst day since 2020, as inflation in August came in at 8.3% above economists expectations. Inflation remained unchanged on a seasonally adjusted basis, despite a 10.6% decline in the gasoline index.
Core CPI before seasonal adjustment rose 6.3%, compared to 6.1% estimated. CPI for all-urban consumers increased 0.1% in August, after being unchanged in July.
The U.S. Labor Department highlighted increases in inflation being largely attributed to rising rent, food and healthcare costs.
The food index increased 0.8% in August, while the shelter index increased by 0.7%. Medical care services rose 0.8% in August, doubling from just 0.4% in July.
Despite a strong labor market and wages remaining steady, inflation has been eating into daily living essentials such as housing, food, healthcare and transportation. A declining savings rate, higher interest rates and slowing economic growth indicate that more pain is likely ahead.
In June 2022, inflation for all items rose 9.1% year over year, it’s highest increase in 40 years. Rising inflation in June was largely attributed to higher food and energy prices. However, for the month of August consumers are now fighting rising costs in rents and healthcare.
Unfortunately, a falling energy index was not enough to combat rising inflationary pressures in other areas of the economy. This may be a signal of the ”pain” that Fed Chairman Powell alluded to at the last Jackson Hole Meeting.
What’s Next?
The Federal Reserve is using all of its tools to fight inflation and will likely have to do more in order to get it under control. As policy makers reacted late on inflation, continuing to raise interest rates might not be enough as core CPI remains unhinged.
A 0.75% – 1.00% rate hike is likely at the next Federal Reserve Meeting later this month, bringing the target Federal Funds Rate between 3.00 – 3.25%.
While many politicians, central bankers and economists have said that we are not in a recession, it’s clear that the economy is heading into a period of slower economic growth.
S&P 500: Final Takeaway
The stock market has been on a rollercoaster the past few weeks as investors digest higher interest rates and a slowing economy.
While the Fed has adopted an aggressive stance on fighting inflation, there has yet to be an indication that inflation has reached its peak.
Investors should remain calm and keep an eye on core CPI going into the end of 2022. They should also watch the Fed’s next move on interest rates at the next meeting on September 20, 2022.
