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The CPI Nosedive

The main stock exchanges in the United States had their worse day since the early days of the pandemic. The reason? The US thought inflation was under control, but a report by the Bureau of Labour Statistics (BLS) about the Consumer Price Index (CPI) in August sent the markets into a tailspin. All three American stock markets suffered their worst daily losses since June 2020, which feels a lot longer than a little over two years ago.

The Trigger

On Tuesday, the BLS revealed that the CPI for August showed prices rose 8.3% year over year and .1% over the previous month. The consensus among economists before the report was that prices would rise by only 8.1% YOY and decline by .1% from July. Essentially, experts thought that the Fed’s actions, coupled with decreasing fuel prices, would pump the brakes harder on the extreme inflation in the US. When the real numbers showed that the brakes did not slow things down as much as predicted, there became real worries about the future of the American economy.

Technology stocks took big hits, with the Nasdaq Composite falling by 5.2% on Tuesday. This fall is the seventh time this year that the Nasdaq fell by more than 4%. The Nasdaq experienced ten such days in 2020, but none in 2021. Likewise, the S&P 500 slid by 4.3%, while the Dow Jones Industrial Average fell by 4%.

The Prediction

The Fed’s main device for pumping the brakes on inflation has been to increase interest rates, and it has been doing so in a series of increases. Because price increases have not moderated as much as expected – although they are better than earlier in the year when they were reaching 40-year records – it is clear to most prognosticators that the Fed will have to intervene further via interest rate hikes. In simpler terms, the Fed will likely raise rates by another .75% in the near future. The Fed has its next policy meeting next week, after which the financial world is now expecting such a hike.

What is most worrisome for experts is that “core inflation”, which focuses on less volatile costs like food and energy, saw a price increase of over 6.3% in the last year. Much of these cost increases come from housing – rental prices are surging across the country – and housing costs comprise about one-third of CPI. The causes for housing price increases essentially amount to low supply and high demand, and this is a structural problem that does not seem like it will fix itself anytime soon. Therefore, the reasons behind sustained inflation in the United States will not disappear, and because of that, experts are much less bullish about the American economy than they were even one month ago.