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What does the CPI mean for recession, stock market plunge?

Stocks tumbled on Tuesday on fears that the Federal Reserve will eventually spark a recession that spreads like wildfire after inflation hotter than expected.

The Fed has raised interest rates four times this year in an attempt to cool rising consumer prices, with Fed Chairman Jerome Powell saying his inflation fight is “unconditional“And the rate hike will continue even if it means some”pain“For Americans.

But despite Powell’s efforts, Inflation, as measured by the Consumer Price Index (CPI), rose 0.1% in August and 8.3% year-over-year, respectively. Bureau of Labor Statistics revealed on Tuesday.

The Dow The Jones Industrial Average dropped more than 830 points (or 2.58%) to 31,546 after the inflation data became public, as experts quickly raised alarms about the growing possibility of a recession due to inflation. Fed caused.

“The Fed is having the worst problem in the world,” said Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisors. Luckargues that the central bank will be forced to keep raising interest rates and shrinking its balance sheet even as economic growth slows, which will lead to a marked increase in unemployment.

“It’s a political problem, not an economic one – and the only cure for the current crisis is a politically infeasible one,” he said. “If the Fed thinks they have been criticized too much by the previous administration (and so have they), wait until they see the kind of criticism they will suffer because they deliberately created an economic scenario that unemployment rate increased significantly.

Zaccarelli seems worried about what comes next: “Not only will they end up causing a recession, but a bad one.”

Nor is he the only economist to warn Americans of the coming “pain” caused by the Fed.

ZipRecruiter’s chief economist, Sinem Buber, told Luck that the rise in core inflation in August, which excludes volatile food and energy prices, is a worrying sign.

“The real action in the report – the focus of the Fed’s attention, and the number most synonymous with future inflation – is core inflation. And that delivered a shock, up +0.6% in August to 6.3% for the year,” she said. “That suggests the Fed may have to keep rates higher for longer to rein in inflation, causing greater pain in the housing and labor markets.”

In particular, an increase in core inflation, may set the Fed’s target as “soft landing“—where inflation is controlled without causing a recession—is out of reach, according to EY Parthenon Chief Economist Gregory Daco.

“Inflation remains widespread and the sequential dynamics for core CPI only fade inflationary dynamics,” Daco said. Luck. “Amid this cycle of global central bank tightening, higher and more persistent inflationary pressures increase the risk of a hard landing.”

And for investors, hot inflation means stocks will continue to face pressure as rising rates increase borrowing costs and lower market valuations.

Cliff Hodge, chief investment officer at Cornerstone Wealth, said: “Unfortunately for the markets, this print will underpin the need for the Fed to continue to be positive and likely to keep risky assets private going forward. the near future,” said Cliff Hodge, chief investment officer at Cornerstone Wealth Luck.

The good, the bad and the bad

Of course, the latest CPI report is not bad. Energy prices overall fell 5% in August, driven by a 10.6% monthly drop in gasoline prices. And used car prices also fell 0.1% last month, following the outbreak of the pandemic.

Overall, however, the latest inflation report is not what Wall Street expected. About 70% of the commodity groups that make up the consumer price index increased their prices annually by more than 4% month-on-month in August. And although gas prices have fallen sharply since June, experts say the drop in energy prices may not last.

Jeffrey Roach, chief economist at LPL Financial, told Luck that he fears rising electricity and natural gas prices this winter will wipe out much of the savings Americans have made from falling gas prices in recent weeks.

Roach also argues that rising food costs are a “growing concern.” Food prices rose 11.4% from a year ago in August, the biggest year-on-year increase since 1979.

“Inflationary pressures are particularly affecting lower-income households, who spend more on food,” Roach noted.

While rising prices at grocery stores are worrying economists, their main concern seems to be an inflation shelter. Overall shelter prices rose 0.7 per cent in August and 6.2 per cent year-on-year.

While that may not seem like much, it’s an important statistic, because shelter prices make up more than 32% of the consumer price index, of which about 8% are rents and about 24% are rents. owner’s equivalent (OER)—which is determined by a monthly survey asking consumers who own an apartment themselves how much they would pay to rent instead of owning their home.

Liz Ann Sonders, chief investment strategist at Charles Schwabnoted in a Third Tweet that the OER portion of the August CPI showed an increase of 6.3% year-on-year. That was the fastest increase since April 1986.

“The housing sector is important as it accounts for almost a third of the total CPI and is likely to be a consistent contributor to inflation as slow and fixed rents are reflected in CPI across surveys. There is a significant lag in reporting,” Jay Hatfield, CIO of Capital Infrastructure Advisors, told Luck.

However, Hatfield argues that the Fed’s policies of raising interest rates and shrinking the balance sheet, thereby reducing the money supply, will ultimately have the effect of controlling inflation.

“We continue to be optimistic that inflation will ease gradually over the next 6 months as the Fed reduces the money supply by 15% creating a very strong dollar and slowing the housing sector due to high mortgage rates,” Hatfield said. significantly more”.

Bank of America Economists, led by chief economist Michael Gapen, are not optimistic about the timing, assuming real price stability won’t come until 2024 in a research note on Tuesday. And, like most of their peers, the BofA team is also concerned about the potential for an increased “hard landing” to the US economy.

“Overall, a solid reading of core CPI and core commodity prices suggests that underlying price pressures remain stable and, in our view, the Fed’s work has only just begun,” they wrote. “The solid job gains coupled with corporate core inflation suggest additional tightening monetary policy and risks of a hard landing.”

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