Inflation Isn't Going Away Yet

By Alex Eule |  Wednesday, May 11 No Help From the CPI. Yesterday, we asked whether a cooler inflation reading might help reverse a tough stretch for stocks. It didn't happen. While growth in the consumer price index for April was a bit lower than a month ago, the year-over-year gain of 8.3% was still above economists' forecast for 8.1%.  That was enough to ruin any hope that we've reached a peak in inflation. Prices could continue to soften in the months to come, but the market is in a fragile place. And for today, at least, it wasn't able to handle another disappointment.  After initially trying to find good news in the report, stocks turned negative in the early afternoon and then kept falling from there. The S&P 500 closed down 1.65%, near its low for the day. Bear market territory is quickly approaching with the index now down 18% from its Jan. 3 record. The Nasdaq Composite continues to bear the brunt of investors worries, though. The tech-heavy index fell another 3.2% today, giving the tech-heavy index a loss of 29% since its November peak. For those still keeping score, that puts the Nasdaq deep into a bear market, which is defined as a loss of 20% or more.  One worrisome part of the latest CPI report is that inflation is now being driven by the services sector, where supply chain woes can't be an easy scapegoat.  It "undermines the conventional wisdom that inflation is mainly about supply-side issues that the Federal Reserve can’t affect," my colleague Lisa Beilfuss wrote today. This excerpt from her story caught my attention:  The longer inflation stays higher and especially with the current dynamics—where inflation is being driven by service prices with wages and prices now chasing each other—the less likely the Fed will be able to engineer a soft landing, says [Citi economist Veronica] Clark. Even a “softish” landing, as Fed Chairman Jerome Powell has more recently suggested, is becoming less likely. “It means the Fed needs to be even more hawkish,” says Clark. “They need to cool demand significantly.”  Investors had finally come to grips with half-point rate cuts in the coming months. Now, an even larger three-quarter point rate hike could be back on the table. The risk is that the more aggressive the Fed gets, the more likely it is that the economy tips into a recession. And that's why stocks are still struggling to find a bottom.

 

DJIA: -1.02% to 31,834.11 S&P 500: -1.65% to 3,935.18 Nasdaq: -3.18% to 11,364.24 The Hot Stock: Electronic Arts +8.0% The Biggest Loser: DISH Network -19.7% Best Sector: Energy +1.3% Worst Sector: Consumer Discretionary -3.6%