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    Stocks tumble after August inflation tops estimates

    U.S. stocks opened sharply lower on Tuesday after a surprising inflation report showed prices rose more than expected last month.

    Shortly after the opening bell, the S&P 500 was down more than 2%, the Dow off 1.7%, while the tech-heavy Nasdaq dropped 2.8%.

    The Bureau of Labor Statistics released the Consumer Price Index (CPI) for August early Tuesday, which showed prices rose 8.3% over the prior year and 0.1% over the prior month. Economists had expected an 8.1% increase in inflation over last year and a decline of 0.1% over the prior month.

    This reading marks some moderation in price increases — which reached four-decade highs earlier this year — but this smaller-than-expected decline likely clinches another 0.75% rate hike from the Federal Reserve at its policy meeting next week.

    On a “core” basis, which excludes the more volatile costs of food and energy, prices rose 6.3% over last year in August and 0.3% over the prior month. Much of the steady rise in core inflation comes from the cost of shelter, which rose 0.7% over the prior month in August, the most since January 1991. Shelter costs comprise about a third of CPI.

    “Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core CPI is once again on the rise, confirming the very sticky nature of the U.S. inflation problem,” said Seema Shah, chief global strategist at Principal Global Investors.

    Following Tuesday’s report, data from the CME Group showed investors pricing in an 82% chance of a 0.75% rate hike next week and an 18% chance of a 1% rate hike. Last week, this data reflected a 75%-25% split between a 75 basis point and a 50 basis point rate hike.

    U.S. Federal Reserve Board Chairman Jerome Powell waits for his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022. Brendan Smialowski/Pool via REUTERS

    Elsewhere in markets on Tuesday, Peloton (PTON) was in the spotlight on the heels of an announcement Monday afternoon that co-founder John Foley is stepping down from the board of directors, months after Peloton hired former Spotify exec Barry McCarthy as CEO. Shares were down as much as 7% early Tuesday amid the broader sell-off in markets.

    Elsewhere, shares of Rent the Runway (RENT) tanked as much as 30% in early trade on Tuesday after the company trimmed its full-year guidance and unveiled plans to cut 24% of its corporate workforce, citing “potentially rougher macro conditions.”

    Over the next few weeks, market action will be all about the Fed and the macro environment, but second quarter earnings season is quickly approaching.

    “Once we get past this week’s CPI and PPI inflation reports and next week’s FOMC meeting, the next major market catalyst will be Q3 earnings,” DataTrek’s Nicholas Colas said in a note this week.

    According to data from FactSet Research, earnings growth expectations for the S&P 500 stand at an increase of 3.7% for the third quarter, down sharply from expectations of 9.8% growth at the end of June.

    Colas points out analysts have cut Q3 earnings expectations over the last 2-3 months for every sector in the S&P 500 except energy, and seven out of 11 groups are now expected to show outright year-over-year declines in earnings, compared to only three in the second quarter.

    Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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