It’s Official: Inflation Is Starting to Rise, and Investors Are Starting to Panic

No longer a theoretical concern, rising inflationary pressures have some on Wall Street spooked and thinking the Federal Reserve could change its approach earlier than expected.

The New York Stock Exchange in Lower Manhattan. (Barbara Leonard photo/Courthouse News)

MANHATTAN (CN) — Markets have spent the last three days on the rocks, as inflationary concerns peaked on Wednesday following striking consumer price information.

By the closing bell on Wednesday, the Dow Jones Industrial Average clocked in at a 682-point loss for the day, about a 2% decrease. Since Monday, the index has dropped more than 1,190 points. The S&P 500 lost 89 points on Wednesday and 170 points for the week, while the Nasdaq fell 2.6%, a 357-point decline, on Wednesday and shed 721 points this week.

The primary driver for the losses seems to be the mounting concern of inflation, which is no longer an ethereal worry. According to the Bureau of Labor Statistics, core inflation rose 3% from the same period last year and 0.9% in the last month alone. Headline inflation, which includes volatile food and energy prices, gained 0.8% last month compared with the 0.2% many analysts had predicted.

The CPI showed the largest year-over-year increase since the period ending September 2008 — a 4.2% increase for all items — with nearly 1% inflated prices for non-food and non-energy items in April. Inflation already had increased 0.6% in March.

Some gain in prices is to be expected, as prices for goods last spring were warped by the pandemic that had just swept over the nation. The numbers still are concerning, however, especially coming on the heels of last week’s disappointing jobs report.

One of the main drivers of the CPI were used-car prices, which picked up 10% last month alone, the biggest one-month increase since the BLS began tracking such data in 1953. Transportation services also gained 2.9% in April, while travel also picked up speed: airline fares gained 10.2%, while hotel prices jumped 7.6%

On the plus side, energy prices have settled down after gaining each of the last 10 months. Gasoline dropped 1.4% and fuel oil decreased 3.2% last month, though the gasoline index has gained almost 50% over the past year.

The numbers were way past what most analysts had predicted, and it is already close to the 2% inflation target set by the Federal Reserve. A day before, Fed Governor Lael Brainard said in a speech that inflation was far from the central bank’s goal and that any uptick would be “largely transitory.” She also predicted — accurately — high headline and core inflation in April and May.

Peter Boockvar, chief investment advisor at Bleakley Advisory Services, wrote in an investor’s note that he has expected inflation “ever since it started to show up at supermarkets,” but that “it now is widespread and showing up in the government stats, and this is even before wage increases of note that are kicking in.”

Many experts are now looking askance at the Fed’s approach and believe the central bank will bump up interest rates earlier than originally expected, perhaps as early as next year.

“Markets and the Fed better hope this is temporary, but unfortunately I repeat my belief that it won’t be,” Boockvar wrote. “Fed policy is so out of touch with realty it is scary, and the five-year inflation breakeven is now rising to the highest since 2005 at 2.8%.”

Earlier in the week, other indicators pointed to a bad CPI report. The National Federation of Independent Business’ optimism survey showed that while many small businesses remained positive about the economy, they also hinted inflation could soon grow.

The number of small companies raising prices jumped 10 points last month to 36%, the highest percentage since April 1981 when it hit 43%, while 36% of the respondent companies plan to hike prices, the highest reading since July 2008.

Things may not settle down quickly, either. “Inflation is likely to head even higher over the next couple of months as price levels in a vibrant, strengthening economy that has supply constraints, contrast starkly with those of twelve months ago when the economy was in lockdown and prices were being slashed in order to generate cashflow,” said James Knightley, chief international economist at ING.

Knightley noted that “economic scarring” from the Covid-19 pandemic has damaged supply chains, which now means supply cannot keep pace with demand. He added that housing costs will help fill out the picture on inflation during the second half of the year, as “primary rents and owners’ equivalent rent account for a third of the CPI basket.”

Brainard also pointed to the supply chain as a major X factor for inflation, but again tried to calm investors. “It is much more difficult to predict the size and duration of supply-side bottlenecks and how these will interact with the pattern of demand to feed through into inflation,” she said on Tuesday. “If past experience is any guide, production will rise to meet the level of goods demand before too long.”

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