Why the Dow plunged 700 points after disappointing inflation data
The stock market took a dive on Wednesday, with the Dow Jones Industrial Average dropping more than 700 points, or 2%, as investors reacted to the latest inflation report. The consumer price index (CPI) rose 0.4% in August, slightly lower than the 0.5% expected by economists, but still higher than the Federal Reserve's 2% target. The annual inflation rate eased to 5.3% from 5.4% in July, but remained at a 13-year high.
The inflation data was seen as a mixed bag by market participants, who are trying to gauge the Fed's next move on tapering its massive bond-buying program. On one hand, the slower-than-expected monthly increase in prices could give the Fed more room to delay its tapering announcement, which could support the market in the short term. On the other hand, the persistent high level of inflation could force the Fed to act sooner and more aggressively, which could hurt the market in the long term.
Some analysts also pointed out that the inflation data was not as benign as it seemed, as some of the factors that contributed to the moderation in August were likely temporary. For example, the prices of used cars and trucks, which have been a major driver of inflation in recent months, fell 1.5% in August, but this was mainly due to supply chain disruptions and chip shortages that have affected the auto industry. Similarly, the prices of airfares and hotel rooms, which have been rebounding from pandemic lows, declined 9.1% and 2.9%, respectively, in August, but this was largely due to the resurgence of COVID-19 cases and travel restrictions.
Therefore, some economists warned that inflation could pick up again in the coming months, as these transitory factors fade and demand continues to outstrip supply. This could put more pressure on the Fed to taper its stimulus sooner rather than later, which could weigh on the stock market.
Another factor that contributed to the market sell-off on Wednesday was the uncertainty over the debt ceiling and government funding. Treasury Secretary Janet Yellen urged Congress to raise or suspend the debt limit as soon as possible, warning that the Treasury could run out of cash by October if no action is taken. She also warned that a default on U.S. debt would have "catastrophic" consequences for the economy and financial markets. Meanwhile, Congress also faces a deadline of September 30 to pass a spending bill to avoid a government shutdown.
The political gridlock in Washington added to the market jitters, as investors feared that a fiscal crisis could derail the economic recovery and exacerbate the inflation problem. The prospects of a bipartisan infrastructure bill and a $3.5 trillion budget reconciliation package also remained uncertain, as Democrats struggled to overcome internal divisions and Republican opposition.
In summary, the stock market faced a perfect storm of negative factors on Wednesday, as disappointing inflation data, Fed tapering fears, debt ceiling worries, and political uncertainty combined to trigger a broad-based sell-off. The Dow closed at 34,577.57, its lowest level since July 19. The S&P 500 and the Nasdaq also fell 1.7% and 0.8%, respectively.