Stocks tumble after inflation stays hotter than expected

New York Stock Exchange traders are shown reacting as the Dow Jones Industrial Average drops more than 1,100 points on Wednesday. © Getty Images / Spencer Platt
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NEW YORK (AP) —Stocks are tumbling and disappointment is shaking markets worldwide Tuesday, following Wall Street’s realization that inflation isn’t slowing as much as hoped.

The S&P 500 sank 2.3% in early trading Tuesday, threatening to snap a four-day winning streak. Bond prices also fell sharply, sending their yields higher, after a report showed inflation decelerated to 8.3% in August, instead of the 8.1% economists expected.

The disappointing data means traders are bracing for the Federal Reserve to ultimately raise rates even higher than expected to combat inflation, with all the risks for the economy that entails.

“Right now, it’s not the journey that’s a worry so much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.”

The Dow Jones Industrial Average lost 603 points, or 1.9%, to 31,777, as of 9:45 a.m. Eastern time, and the Nasdaq composite dropped 3.1%.

Almost all of Wall Street came into the day thinking the Fed would hike its key short-term rate by a hefty three-quarters of a percentage point at its meeting next week. But the hope was that inflation was in the midst of quickly falling back to more normal levels after peaking in June at 9.1%.

The thinking was that such a slowdown would let the Fed downshift the size of its rate hikes through the end of this year and then potentially hold steady through the first half of 2023.

Tuesday’s less-than-anticipated improvement dashed some of those hopes. Many of the data points within the report were worse than economists expected, including those the Fed pays particular attention to, such as inflation outside of food and energy prices.

Markets honed in on a 0.6% rise in such prices during August from July, double what economists expected.

“This suggests that inflation expectations may be becoming ingrained,” said Gargi Chaudhuri, Head of iShares Investment Strategy.

The inflation report arrived before trading began on Wall Street, but it sent a thud through markets worldwide.

Treasury yields immediately leaped on expectations for a more aggressive Fed. The yield on the two-year Treasury, which tends to track expectations for Fed actions, leaped to 3.71% from 3.57% late Monday. The 10-year yield, which helps set where mortgages and rates for other loans are heading, rose to 3.42% from 3.36%.

Stock markets in Europe, meanwhile, veered from gains to losses. The German DAX was down 1.1%, and the French CAC 40 fell 1%.