Time For A Long Hike

Image source: serdar_basak – Shutterstock

What's going on?

Data out on Tuesday showed US consumer prices rose more than expected last month.

What does this mean?

Delighted by July’s lower-than-expected inflation, hopeful economists thought August’s outlook might keep the good energy going. Well, it didn’t: energy prices might’ve fallen 5% from the month before following a well-needed 11% drop in gasoline prices, sure, but that boon was offset almost everywhere else. Food prices and medical services were up 0.8%, while accommodation-related costs – which make up a third of overall inflation – saw their highest uptick in about 30 years. All in all, then, US consumer prices rose 0.1% in August, not quite the 0.1% drop economists predicted and enough to mark a worse-than-expected 8.3% gain from August last year.

Why should I care?

The bigger picture: Pass the hiking boots.
Energy’s been a key inflation driver in the US this year, but those prices are finally cooling down now. Shame, then, that rising costs everywhere else are fanning the flames instead, signaling that once-concentrated inflation has spread and won’t be as easily extinguished. That might be why markets have now fully priced in a 0.75% hike from the Federal Reserve (the Fed) next week, and taken any previous 0.5% bets completely off the table. Some, predicting a more aggressive strategy, even think there’s a 10% chance the Fed could hike rates by a whole percentage point.

For markets: Investors are fed up.
Investors will be frustrated by the prospect of a longer, more aggressive interest rate campaign designed to rein in increasingly stubborn inflation. After all, the value of any stock is the value of its future earnings discounted back to today – but those future earnings are worth less as interest rates rise. That could be why the S&P 500 fell 2.6% after the news broke, while the Nasdaq – chock-a-block with tech companies that are ultra-sensitive to rate hikes – fell a whopping 3.3%.

Originally posted as part of the Finimize daily email.

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