A sharp rise in wholesale prices triggered a drop in stock value across the biggest US market indices yesterday. The S&P 500, Nasdaq and Dow Jones Industrial Average were all down from record highs as investors got the jitters ahead of the forthcoming Federal Reserve monetary policy meeting today.
The tech-heavy Nasdaq was hardest-hit with a fall of 1.78% followed by a drop for the S&P500 of 1.10% while the Dow was down by 0.34%. Big fallers on the Dow included Microsoft (-3.26%) and Apple (-0.30%), while Adobe Systems Inc fell by 6.60% on the Nasdaq. But while tech stocks were hardest hit, it was also a gloomy day for brands ranging from Home Depot and Walt Disney to Boeing and Visa.
November’s Producer Price Index (PPI) showed the highest rise since 2010 with a gain of 9.6% over the past 12 months. The PPI figure is a measure reported by the Bureau of Labor Statistics of how much businesses are paid for their final goods and services each month. This month’s figure was up 0.8% compared to October’s PPI statistic.
The bulk of the PPI rise was based on the growth in the cost of goods, but indications are pointing towards an increase in the price of services too. The core PPI figure, which is that without energy and food costs, rose by 0.7% making it the largest monthly rise since July. In the past year, the core PPI has rocketed by 6.9% which is the fastest rise since August 2014.
Such a record-breaking rise shows that inflation in the US is still accelerating and such issues will play a big part in how the Fed handles monetary policy at today’s meeting. Not only has PPI data been soaring, but November’s consumer prices skyrocketed at 6.8% to mark the fastest rate of inflation since 1982. This was due to across-the-board prices rises from used cars to groceries, gas and rent rates. Energy prices have been especially hard-hit with price rises of over 33% recorded in November compared to the same period in 2020.
Why is inflation hitting the US so hard?
While other regions such as Europe and Asia are seeing increased inflation, the focus appears to be on the US. Much of this has been due to a combination of a supply chain crisis and shortage of raw materials, alongside increased confidence resulting from the removal of various restrictions following the Covid-19 pandemic.
However, there are fears that a slowing economic growth resulting from the new Omicron variant could combine with the breakaway inflation to produce the much-feared stagflation. Such stagflation first came to light in the 1970s where the oil crisis led to a rapid rate of inflation, which when combined with high unemployment rates, had a toxic effect on the economy. This week’s two-day meeting at the Fed will aim to strike a balance between measures to continue the improving employment figures while containing the rapid price rises.