Friday morning saw a sharp decline in U.S. stocks, following the release of inflation data from the Federal Reserve’s preferred gauge. The Dow Jones Industrial Average was down 1.2%, the S&P 500 dropped 1.3%, and the technology-heavy Nasdaq Composite fell 1.6%, according to FactSet data.
The Bureau of Economic Analysis reported that the personal-consumption-expenditures-price index rose 0.6% in January, leading to a year-over-year rate of 5.4%. Core PCE prices, which do not include food and energy, also increased 0.6% in January, and 4.7% from a year ago. This was higher than the prediction of economists polled by The Wall Street Journal, who had expected the PCE prices to rise 0.5% in January and 4.4% year over year.
The market reaction to the inflation numbers was swift, with stocks opening sharply lower. Investors are concerned because the higher-than-expected inflation numbers indicate that the economy is growing faster than expected, which could lead to higher interest rates. This could in turn lead to a decrease in demand for stocks, as investors look for safer investments that provide higher returns.
The Federal Reserve has been taking a measured approach to raising interest rates, and the current rate is still low by historical standards. However, if the inflation numbers continue to rise, the Fed may be forced to take a more aggressive stance in raising rates. This could have a major impact on the stock market, as higher interest rates tend to depress stock prices.
In addition, higher inflation numbers could lead to higher wages, as businesses are forced to pay more to attract and retain employees. This could lead to higher costs for businesses, as well as higher prices for consumers. This could have a negative effect on the stock market, as it could lead to a decrease in demand for goods and services, as well as a decrease in profits for businesses.
The market is also concerned about the potential for higher inflation in the future. If inflation continues to rise, it could lead to a decrease in the purchasing power of the dollar, which could lead to higher prices for goods and services. This could have a negative effect on the stock market, as investors would be less likely to invest in stocks if they believe that their money will not be worth as much in the future.
Overall, the market’s reaction to the inflation data was swift and negative. Investors are concerned about the potential for higher inflation in the future, which could lead to higher interest rates, higher wages, and higher prices for goods and services. This could have a major impact on the stock market, as investors look for safer investments that provide higher returns. It remains to be seen how the market will react in the coming weeks and months, and how the Federal Reserve will respond to the inflation data.
