Dow falls more than 500 points after January inflation surprise

Stocks took a hit Tuesday after the Labor Department’s latest inflation reading came in higher than expected, fueling concerns on Wall Street that the Federal Reserve might not cut interest rates as early or as many times this year as it previously anticipated.

The Dow Jones Industrial Average dropped more than 500 points, or nearly 1.4 percent, as of closing on Tuesday. The S&P 500 fell nearly 1.4 percent, and the Nasdaq dropped 1.8 percent.

Prices rose 0.3 percent from December to January and were up 3.1 percent from the same period a year ago, according to the consumer price index (CPI) released Tuesday.
Economists polled by The Wall Street Journal had predicted a 0.2 percent monthly increase and a 2.9 percent annual increase.

“The consumer price index came in slightly hotter than expected this morning, but showed continued gradual progress in the fight against inflation,” said Julia Pollak, chief economist at ZipRecruiter.

“The major culprit was housing costs, which rose 0.6% in January and contributed over two-thirds of overall inflation during the month. Even though high interest rates have dramatically cooled activity in the housing market, prices have not fallen because housing inventory is so scarce.”

The economy is doing much better overall than it was two years ago, just before the Fed launched its interest rate hike crusade in an attempt to curb rampant inflation. While inflation has fallen from its 9 percent peak in summer 2022, it has not yet dropped to the central bank’s 2 percent target.

“Today’s CPI report caught a lot of people off guard – many investors were expecting the Fed to begin cutting rates and were spending a lot of time arguing that the Fed was taking too long to get started – not appreciating that inflation could be sticky and not continue down in a straight line,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“This is only one month’s report and if next month’s report shows a decline in inflation then this will have been just a bump in the road, but if we see a new pattern of inflation stalling out at current levels (or worse increasing from here) then the stock market has further to fall.”

The Fed signaled in December that it would cut interest rates this year, although it has not specified when. But as the 2024 election heats up, the politically independent central bank is increasingly becoming the target of partisan attacks.

Some Democrats have urged Fed Chair Jerome Powell to cut interest rates, which they say have exacerbated a housing affordability crisis in the U.S.

Former President Trump, the front-runner for the Republican presidential nomination, accused Powell — a lifelong Republican and Trump appointee — of being “political.” He also suggested Powell would consider cutting interest rates to help Democrats during the upcoming election.

Trump currently has an edge over President Biden in polling on economic issues, which are poised to play a major role in the first election after the pandemic recovery. A recent Financial Times poll showed Trump 11 points ahead of Biden on who voters believe would best handle the economy.