Inflation worries rise in the U.S. as prices of food, clothes, cars spike

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Stocks in the United States were broadly lower again Wednesday as investors’ concerns about inflation grew after government data showed signs of prices increasing across a number of goods.

The S&P 500 was down 1.4 per cent in afternoon trading, extending its weekly drop to 3.3 per cent. The tech-heavy Nasdaq was off 1.9 per cent, and it’s now down 4.4 per cent so far this week. The Dow Jones Industrial Average gave up 405 points, or 1.2 per cent.

Meanwhile, the Toronto Stock Exchange was down .55 per cent by mid-afternoon. 

A worrisome bout of inflation struck the U.S. economy in April, with consumer prices surging 0.8 per cent and the year-over-year increase reaching its fastest rate since 2008.

The acceleration in prices, which has been building for months, raised concerns that it could weaken the economic recovery from the pandemic recession. 

Inflation a top economic concern 

Investors have been worrying that inflation could return after being absent for many years as the economy revs out of the recession brought on by the pandemic. However Federal Reserve officials and other economists have said moderate inflation may be a good thing in a recovery.

Wednesday’s report from the Labour Department indicated that the prices consumers pay for everything from food and clothes to new cars rose at a faster pace than last month’s 0.6 per cent rise.

And over the past 12 months, prices are up 4.2 per cent — the fastest rise since a 4.9 per cent gain in the 12 months that ended in September 2008. Excluding volatile food and energy, core inflation jumped 0.9 per cent in April and three per cent over the past 12 months.

After years of dormant inflation, with the Federal Reserve struggling to increase it, worries about rising prices have shot to the top of economic concerns. Shortages of goods and parts related to supply bottlenecks have been a key factor.

Investors have grown increasingly jittery. On Tuesday, the Dow Jones Industrial Average fell by more than 470 points, or 1.4 per cent, its worst day since Feb. 26.

April’s sharp increase in inflation was led by a record 10 per cent surge in the price for used cars and trucks. Motor vehicle production has been hampered by a global semiconductor shortage, boosting demand for used automobiles.

While the latest reading on inflation was hotter than expected, the market shouldn’t be too surprised about it rising, said Jeff Buchbinder, equity strategist at LPL Financial. The prevailing sentiment is that rising inflation will be temporary, though “it’s too early to say whether these higher levels are going to be sustained,” he said.

Inflation numbers high in Canada

In Canada, the most recent inflation numbers were high, due in large part to a plunge in prices a year ago, when the pandemic was in its early stages.

Statistics Canada said in April that the consumer price index in March was up 2.2 per cent compared with a year ago.

The increase compared with a 1.1 per cent year-over-year increase in February, which was then a pandemic-era high.

The inflation rate is the biggest factor that the Bank of Canada considers when setting its benchmark interest rate. The bank likes to see an inflation rate of between one and three per cent.

All things being equal, the bank cuts its rate to stimulate the economy when the inflation rate is too low, and it raises its benchmark lending rate to cool things down when inflation is too high.



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