Fears of rising inflation hammered Wall Street on Wednesday, with grim consumer price data sparking a sell-off in blue chip and technology shares, while amplifying new concerns about the rebound from COVID-19.
A brutal drop that began early in the week congealed into a third consecutive day of losses. The Dow Jones Industrial Index, S&P 500 Index and Nasdaq all plummeted, closing more than 2% lower on the day. Tech stocks suffering their worst day since March 18, according to Yahoo Finance data, while the Dow had its worst showing since late January.
With a weekend cyber-attack sharply driving up the cost of gas nationwide — while sparking shortages — investors are growing increasingly restive that price pressures may be rousing themselves from an extended slumber. Mounting signs of supply shortages in the face of surging demand threatening to spur a rapid rise in prices.
Those fears crystallized early Wednesday, after the government reported that headline consumer prices surged by a faster than expected 4.2% last month. Excluding food and energy, prices jumped 0.9 percent in April (SA) and are up 3.0 percent over the year.
The jitters have surfaced as the U.S. economic recovery — hammered by the COVID-19 pandemic — appears to be quickening. A report from the Labor Department on Tuesday showed job openings reached a record high in March, and a separate survey showed a record proportion of small business owners reported job postings that could not be filled last month.
“It’s not a matter of whether inflation is going to be firming over the next couple of months … it will,” Garrett Melson, a portfolio strategist at Natixis Investment Manager Solutions, told Yahoo Finance on Wednesday.
“The bigger story is whether we’re seeing a persistent and structural shift higher in prices,” he added.
A system-wide disruption following a cyberattack on a key energy pipeline operator has sent gasoline prices higher, accelerating an already upward-moving trend in energy prices as demand for travel and fuel resurges coming out of the COVID-19 pandemic.
The tableau of faster growth and soaring prices complicates the Federal Reserve’s policy of allowing the economy to run hot — and Wall Street’s willingness to take the central bank at its word.
“Regardless of what happens with inflation over the next few months, I believe the Federal Reserve is more focused on the employment part of its dual mandate and will remain accommodative for as long as it takes to ensure the economy returns to full employment,” said Nancy Davis, founder and portfolio manager at Quadratic Capital Management, with roughly $3 billion in assets.
The Fed “has a dual mandate of price stability and maximum employment and I believe the Fed is ready to sacrifice the former to save the latter,” Davis added.
Investors have in turn also been pondering when the Fed might step in and adjust its highly accommodative monetary policies to stave off rising inflation. Many policymakers, however, have remained of the view that the central bank needs to keep rates low and sustain asset purchases at their current, aggressive rate to support the economy, which is still emerging from a worldwide health crisis.