Stocks fell into negative territory for the month on Thursday after data showing prices paid among producers surged more than expected in January—raising the risk that inflation may stop slowing down despite remaining well above historically acceptable levels.
The Dow Jones Industrial Average fell 390 points, or 1.2%, to about 33,735 on Thursday, as the S&P 500 and tech-heavy Nasdaq shed 1.3% apiece—losses that intensified after the producer price index, a forward-looking indicator measuring inflation among producers, came in much hotter than expected and rose at the fastest pace since June.
According to the Labor Department, prices paid to U.S. producers rose 0.7% on a monthly basis as energy prices once again spiked in January—exceeding projections of a 0.4% increase after prices fell 0.2% in December.
In an email, Comerica Wealth Management chief investment officer John Lynch said the data “suggests the easy battles against price pressures have been won,” and that the journey to normal inflation levels will prove to be challenging—particularly since last month’s consumer price index report also came in much hotter than expected.
Adding to investor concerns, Cleveland Fed President Loretta Mester on Thursday admitted she saw a “compelling” case for a second half-point rate hike earlier this month, rather than the quarter-point hike ultimately authorized, saying she welcomes the moderation in inflation readings since last summer but cautioning, “the level of inflation matters, and it is still too high.”
The Fed official lamented that the Labor Department on Tuesday reported prices rose 6.4% year over year and showed overall inflation accelerated on a monthly basis—serving as a “cautionary tale against concluding too soon” that inflation is on a sustained path back to the Fed’s historical target of 2%.
Amid record consumer spending and crippling supply-chain constraints, inflation skyrocketed to a 40-year high of 9.1% in June—forcing the Fed to embark on its most aggressive economic tightening campaign in decades. With the central bank’s rate hikes slowing down the economy, many experts have argued the Fed could be risking an unnecessary recession, but increasingly, others have warned inflation could remain at historically high levels for longer than expected or even flare up again. “Under-tightening raises the risk that inflation will [remain] stubbornly above our goal—imposing both short-run and long-run costs on households and businesses,” Mester said on Thursday.
What To Watch For
The Fed’s next interest rate announcement is slated for March 22. Goldman Sachs economists project the central bank will deliver quarter-point hikes at its next two meetings and then hold top interest rates at 5.25%, the highest level since 2007, for the rest of the year. However, immediately after the Thursday data, markets started pricing in the possibility of up to four rate hikes this year.
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