US Stocks Fall After Higher Than Expected Inflation Data

US stock indices tumbled from their all-time highs following the release of January's inflation data

by Faruk Imamovic
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US Stocks Fall After Higher Than Expected Inflation Data
© Getty Images/Michael M. Santiago

US stock indices tumbled from their all-time highs following the release of January's inflation data, which surpassed expectations and dampened hopes for a near-term shift in the Federal Reserve's monetary policy stance.

Inflation Surges Beyond Forecasts

The latest Consumer Price Index (CPI) figures delivered a cold shower to the markets, climbing 0.3% month-over-month and 3.1% from the previous year, outpacing the forecasted increases of 0.2% and 2.9%, respectively.

Core CPI, which strips out the volatile food and energy components, marked its largest ascent in eight months, rising by 0.4% for the month and 3.9% on an annual basis against predictions of a 0.3% monthly and 3.7% yearly increase.

This surge in core CPI is particularly significant because it is the gauge most favored by Federal Reserve officials, who have consistently signaled that substantial proof of declining inflation would be required before considering interest rate cuts.

Instead, the CPI data served as a stark reminder that the journey to tame inflation is far from over, potentially necessitating a "higher-for-longer" approach to interest rates.

Market Impact and Analyst Perspectives

The reaction in the stock market was swift and severe, with no US index left unscathed.

The Dow Jones Industrial Average saw a precipitous drop, shedding over 700 points at one point on Tuesday, marking its most significant decline in nearly a year. Similarly, the S&P 500 retreated below the 5,000 mark, while the Nasdaq Composite faced a 1.80% decrease.

Quincy Krosby, LPL Financial's chief global strategist, encapsulated the sentiment, noting, "A market that forcefully expected earlier easing has had to digest not just consistent Fedspeak but the stark reality that the Fed cannot yet declare victory on inflation." This adjustment in expectations has led to a recalibration of the odds for a rate cut in May, which declined to 35% from a 64% chance prior to the inflation report.

Despite the immediate market turmoil, some analysts remain optimistic about the medium-term outlook. Brian Rose, senior US economist at UBS Global Wealth Management, suggests that the CPI data disruption does not alter the fundamentally positive forecast for 2024, which includes solid growth, further disinflation, and the commencement of Fed rate cuts in the second quarter, all conducive to risk assets.

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