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    Stocks Fall on Hotter-Than-Expected Inflation Data

    The Dow Jones Industrial Average slumped more than 1,000 points Tuesday after hotter-than-expected inflation data dashed investors’ hopes that cooling price pressures would prompt the Federal Reserve to moderate its campaign of interest-rate increases.

    Investors sold everything from stocks and bonds to oil and gold. All 30 stocks in the blue-chip average declined, as did all 11 sectors in the S&P 500. Only five stocks in the broad benchmark were in the green in recent trading.

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    META -9.17%

    parent Meta Platforms dropped 8.3%,

    BlackRock

    declined 7.2% and

    Boeing

    fell 6.4%.

    The 3.3% tumble in the Dow put the index on pace for its worst day since May. The S&P 500 declined 3.7%, while the Nasdaq Composite slid 4.5% as rate-sensitive technology stocks took a heavy beating.

    The Dow is off 14% in 2022, while the S&P 500 is down 17% and the Nasdaq Composite has fallen 25%.

    Investors had keenly anticipated Tuesday’s release of the consumer-price index, which provided a last major look at inflation before the central bank’s interest-rate-setting committee meets next week. Expectations for the path of monetary policy have held sway over the markets as investors factor higher rates into asset prices and try to project how well the economy will hold up as rates rise.

    “It increases the probability of recession if the Fed has to move more significantly to address inflation,” said Chris Shipley, chief investment strategist for North America at Northern Trust Asset Management.

    The consumer-sentiment index and the consumer-confidence index both try to measure the same thing: consumers’ feelings. WSJ explains why the Federal Reserve is keeping a close eye on consumer confidence in 2022. Illustration: Adele Morgan

    The new data showed the consumer-price index rose 8.3% in August from the same month a year ago. That was down from 8.5% in July and 9.1% in June—the highest inflation rate in four decades.

    The figures show inflation is easing, but at a slower pace than investors and economists had anticipated. Economists surveyed by The Wall Street Journal had been expecting consumer prices to rise 8% annually in August.

    Analysts had hoped that officials would consider easing their pace of interest-rate increases if data continued to show inflation subsiding. The data undercut those hopes, seeming to settle the case for the Fed to raise rates by at least 0.75 percentage point next week. After the release, stock futures fell, bond yields rose and the dollar rallied.

    Traders began to consider the possibility that the central bank will raise interest rates by a full percentage point next week.

    As of Tuesday afternoon, they assigned a 28% probability to a one-percentage-point increase at that meeting, up from a zero-percent chance a day earlier, according to CME Group’s FedWatch Tool.

    The market-based probability of a 0.5 percentage point increase, by contrast, fell to zero from 9% on Monday, according to the CME data.

    The most likely scenario remained an increase of 0.75 percentage point.

    Beyond next week, the suggestion that inflation is sticking around raises the possibility that the Fed might ultimately raise rates higher than markets had been anticipating.

    “That’s really the challenge,” said Matt Forester, chief investment officer of Lockwood Advisors at BNY Mellon Pershing. “The Fed might have to do a lot more work in order to contain inflation.”

    Food prices have surged as part of a broader pickup in U.S. inflation.



    Photo:

    michael reynolds/EPA/Shutterstock

    Mr. Powell said earlier this month that the central bank is squarely focused on bringing down high inflation to prevent it from becoming entrenched as it did in the 1970s.

    The reaction to the new inflation reading could be seen across asset classes.

    The communication services, technology and consumer discretionary sectors of the S&P 500 all fell more than 4.5%. Semiconductor stocks were particularly hard hit:

    Western Digital,

    Nvidia,

    Advanced Micro Devices

    and

    Micron Technology

    declined more than 7%.

    In bond markets, the yield on the benchmark 10-year U.S. Treasury note jumped to 3.429% from 3.361% Monday. Yields and prices move in opposite directions. The rise in bond yields was an additional sign that investors were expecting higher interest rates after the data. 

    Brent crude, the international benchmark for oil prices, fell 0.9% to $93.17 a barrel. Gold prices declined 1.3%.

    The U.S. dollar, by contrast, rallied Tuesday. The WSJ Dollar Index, which measures the greenback against a basket of other currencies, rose 1.3%. The strong dollar has weighed on the value of other currencies against the greenback this year.

    Overseas, the pan-continental Stoxx Europe 600 fell about 1.5%. In Asia, major indexes closed mixed. South Korea’s Kospi Composite rallied 2.7% , while Hong Kong’s Hang Seng declined 0.2%. 

    Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Karen Langley at karen.langley@wsj.com

    Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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