A Spike in Inflation Spooked Investors — Until It Didn’t

Putting its midweek freakout in the rearview window after consumer prices rose drastically, Wall Street was able to recoup nearly all of its losses.

(Barbara Leonard photo/Courthouse News)

MANHATTAN (CN) — The stars aligned for a really, really bad week in the market, as news of a massive increase of inflation caused investors to dump stocks on Wednesday. But by Friday, despite other data validating inflationary concerns, Wall Street put the rout behind it.

Back on Wednesday, the beating that markets took marked their worst losses since last fall. In addition to core inflation in April rising 3% year over year, the consumer price index ratcheted its largest year-over-year increase since September 2008.

The rebound has been quick if complete. The Dow Jones Industrial Average, for example, gained about 400 points on Thursday and added another 359 points by Friday’s closing bell. For the week, however, the Dow was still down nearly 400 points.

The S&P 500 and Nasdaq also both fell sharply on Wednesday and were unable to make back all of those losses, decreasing 59 points and 323 points for the week, respectively.

For some, the return to market gains makes sense. “This bull market isn’t over,” James Vogt at Tower Bridge Advisors wrote on Friday, noting that inflation should subside once supply chains are fixed. “These corrections can last another week or several months, but markets do not peak until earnings do. We’re far from that today.”

The CPI wasn’t the only dire report this week, though, as producer price index prices showed a 0.6% jump in April. The spike was twice what many analysts had predicted, and it is the largest advance since 2009.

What’s more, wholesale inflation reached 6.2% from 4.2% in March, the highest level in more than a decade. Food prices leapt up 2.1%, while transportation and warehousing costs saw an identical increase. The only category to see a drop was energy, which fell 2.4%

PPI measures inflation from the perspective of producers and is considered a tipoff to rising inflation as a whole.

Retail sales also petered out last month after going gangbusters in March, with the U.S. Census Bureau reporting 0% in new monthly sales in April. The largest falls were in clothing sales and general merchandise, each of which fell about 5%. Auto sales gained 2.9% in April, while food services and bars also picked up 3%.

“It is just hard sometimes to keep spending more,” economic consultant Joel Naroff wrote Friday, noting that the drop in general merchandise and apparel were odd outliers. “These are huge changes that are hard to explain.”

The flat numbers caused some concern among Capital Economics analysts, who say “mounting labor shortages and rising prices are starting to constrain the recovery,” and that “unless services consumption starts to recover more rapidly it may not prove as strong as we had previously assumed.”

Capital Economics analyst Paul Ashworth maintains that gross domestic product growth could fall short of his original 6.5% forecast. He also noted, however, that “if these supply shortages are mostly teething problems associated with the rapid reopening of the economy, then weaker growth this year could simply mean more growth next year.”

At least one data point continues to point in a positive direction: unemployment claims. According to the Labor Department, unemployment claims hit a new low during the pandemic, falling to 473,000 initial claims for the week ending May 8. The prior week, 507,000 new claims were filed after a 9,000 revision.

“We still have a lot of reopening to go through and that will keep activity rising strongly, at least through the summer,” Naroff wrote. “But for investors, it does raise the warning flat that the strong periods of growth may be coming to an end and the economy will start easing back toward trend growth.”

Another trend that has some worried is the slowdown in U.S. vaccinations. Earlier in the week, the U.S. Centers for Disease Control and Prevention announced that fully vaccinated people can unmask in most situations.

The U.S. Center for Disease Control and Prevention reporting about 154 million Americans have received at least one dose of a vaccine, while 119 million Americans — or 36% of the population — are fully vaccinated. According to data compiled by Johns Hopkins University, 1.4 billion vaccines doses have been administered worldwide.

%d bloggers like this: