Stock and crypto markets saw share prices spike over the weekend in anticipation of a positive inflation report for August, but markets plummeted Tuesday when expectations for cooler inflation numbers failed to materialize.
Inflation rose a higher-than-expected 0.1 percent in August and 8.3 percent year over year, with higher prices for food, shelter and medical care offsetting a drop in gas prices, the Bureau of Labor Statistics reported Tuesday. The core Consumer Price Index for all items less food and energy increased 0.6 percent in August, up 6.3 percent over the year and a much larger increase than in July.
Economists had been expecting headline inflation to fall 0.1 percent instead of rising with a rise of 0.3 percent for core inflation, according to Dow Jones estimates. The year-over-year Consumer Price Index remained unchanged in July, and the forecast was for an 8 percent increase in August.
Many investors believed that inflation had already peaked, and stocks and crypto have been rising.
Bitcoin (BTC) rose 15 percent over the weekend in anticipation of a positive August inflation report but its price dropped after the new CPI numbers were released. Bitcoin was trading at $20,946.79 as of this writing, down more than 6 percent in the past 24 hours.
The price of Ethereum (ETH), which has seen an upward price trend because this week’s anticipated software update known as the merge on the Ethereum blockchain, fell more than 7 percent.
Erasing a large chunk of recent gains, the Dow Jones Industrial Average fell by 830 points (2.6 percent) on the announcement. The S&P 500 dropped 3 percent, and the Nasdaq Composite was down 3.8 percent. More than 490 stocks in the S&P 500 went down, including Facebook-parent Meta, down 7.6 percent.
Sectors responsible for the hotter-than-expected inflation report include health insurance, which rose 24.3 percent year-over-year, the largest increase ever. Food was up 13.5 percent, rent was up 15.8 percent, and the cost of services rose more than 6 percent.
Tuesday’s CPI report will guide the Federal Reserve ahead of its Sept. 20-21 meeting, where the central bank is expected to deliver its third consecutive 0.75 percentage point interest rate hike to control inflation. The unexpectedly high August report could lead the Fed to continue its aggressive rate increases longer than some investors anticipated, Coindesk reported.
“The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” said Matt Peron, director of research at Janus Henderson Investors. “It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term.”
Photos: President Joe Biden responds to journalists at Delaware Air National Guard Base in New Castle, Del., Sep. 11, 2022. (AP Photo/Manuel Balce Ceneta) / Background: A before picture in the 158-unit Hotel Barclay, bought by the AIDS Healthcare Foundation in Los Angeles to renovate and upgrade for affordable housing for low-income and formerly homeless, Dec. 22, 2021. (Mark Von Holden/AP Images)