The U.S. stock market opened lower on Friday, as investors digested the latest inflation data that showed wholesale prices rose more than expected in July. The producer price index (PPI) increased 1% month-over-month and 7.8% year-over-year, the highest annual rate since the data series began in 2010. The core PPI, which excludes food and energy, rose 0.9% month-over-month and 6.2% year-over-year, also above consensus estimates.
Inflation Pressures Persist
The PPI measures the prices that businesses receive for their goods and services, and is often seen as a leading indicator of consumer inflation. The July report showed broad-based increases in prices across various sectors, such as transportation, health care, and food. The data suggests that inflation pressures are not easing as quickly as some economists had hoped, and that businesses are passing on higher costs to their customers.
Some analysts pointed out that the PPI data may not fully reflect the impact of the recent surge in Covid-19 cases due to the Delta variant, which could further disrupt supply chains and dampen demand. Others argued that the inflation spike is still largely driven by temporary factors, such as supply bottlenecks and base effects, and that price growth will moderate in the coming months as the economy normalizes.
Market Reaction
The inflation data weighed on investor sentiment, as higher prices could erode corporate profits and consumer spending power. The Dow Jones Industrial Average fell 0.8%, or 271 points, to 35,208. The S&P 500 dropped 0.7%, or 34 points, to 4,436. The Nasdaq Composite declined 0.8%, or 132 points, to 14,837.
The bond market also reacted to the inflation report, as the yield on the 10-year Treasury note rose to 1.36%, up from 1.34% on Thursday. Higher inflation reduces the real value of fixed-income payments, making bonds less attractive to investors. The yield curve, which measures the difference between short-term and long-term interest rates, steepened slightly, indicating that investors expect higher inflation and growth in the future.
The U.S. dollar strengthened against other major currencies, as higher inflation could prompt the Federal Reserve to tighten its monetary policy sooner than expected. The dollar index, which tracks the greenback against a basket of six peers, rose 0.4% to 93.18. A stronger dollar makes U.S.-denominated assets more expensive for foreign buyers, and could hurt the earnings of multinational companies.
Outlook
The market will be closely watching the next inflation report, which is the consumer price index (CPI) for July, due on Wednesday. The CPI measures the prices that households pay for goods and services, and is more relevant for consumer spending and Fed policy decisions. Economists expect the CPI to rise 0.5% month-over-month and 5.3% year-over-year, slightly lower than the June figures.
Investors will also be looking for clues from Fed officials on how they view the inflation situation and when they plan to start tapering their bond purchases. The Fed has maintained that inflation is transitory and that it will keep its ultra-accommodative stance until the economy achieves its goals of maximum employment and stable prices. However, some Fed members have expressed concerns about rising inflation and called for an earlier tapering.
The next Fed meeting is scheduled for September 21-22, and many analysts expect the central bank to announce its tapering timeline then. However, some market participants think that the Fed may delay its decision until November or December, depending on how the Covid-19 situation evolves and how the economic data unfolds.
