US markets tanked on Tuesday night following the release of monthly inflation data. Australian shares followed on Wednesday. The August data showed growth in both headline and core inflation sending investors into a panic amid growing fears of a global recession.

The Dow Jones Industrial Average fell 3.9% over the trading session, the worst intraday dip since June 2020. The S&P 500 slumped 4.3% during the day while the Nasdaq Composite tumbled 5.2%, its worst performing day since March 2020.

The decline in US indexes came as the US Bureau of Labor Statistics announced the consumer price index (CPI) for August rose 0.1% over the month after remaining flat in July. The 0.1% increase means the headline rate is 8.3% in the last 12 months.

In the release the bureau detailed that not only had the headline rate of inflation risen but more worryingly, core inflation had jumped over the month of August. Core inflation which excludes more volatile CPI categories like food and energy prices increased 0.6% on a monthly basis resulting in an annual rate of 6.3%.

Senior economist at Federated Hermes Silvia Dall’Angelo confirmed that August inflation data confirms that the Fed's fight against high inflation is far from over. 

"Despite relief from the recent decline in commodity prices, inflation became more pervasive in August, with the CPI report showing further price rises across core goods and services," he said. 

He believes these CPI figures may cause the Fed to continue aggressively hiking rates. 

"[The August CPI data] will probably tilt an already hawkish Fed to deliver a 0.75% rate hike for the third consecutive time at its meeting next week," says Dall’Angelo.

Morningstar Director Mark LaMonica believes the Fed's aggressive approach in extinguishing the inflation fire will continue to impact investors. 

“Economic pain for shareholders may be a continued fall in share prices driven by compressed valuations and a hit to earnings as higher interest rates slow the economy,” said LaMonica.

Despite the Federal Reserve raising the federal funds rate 225 basis points since March, US inflation has remained sticky. The theory of raising rates to curb soaring inflation has not played out in the US. Instead, CPI has increased 0.4% since February when inflation was at 7.9%. Unlike other months, the August data has shown investors that prices across all categories have jumped.      

 

Inflation’s immunity to the higher interest rates put forth by the increasingly hawkish Fed has reignited fears of a global recession amongst investors causing major sells offs as seen on Tuesday. The yield for two-year Treasury notes jumped to 3.8% amid growing conviction amongst bond traders that a 100 basis point hike might be in store at next week’s policy meeting.

It was only three weeks ago that the Chair of the Federal Reserve Jerome Powell spoke at the Jackson Hole summit reminding markets the Feds main goal is to bring inflation back down to sustainable levels.

“The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” he said.

He confirmed that Federal Reserve was moving their policy stance purposefully in order to achieve a sufficiently restrictive interest rate to return inflation to target. Powell also said the Feds decision at the September meeting will depend on incoming economic data and the evolving outlook which now tells a story of policy-resistant inflation.

Recession fears alive and well

Fears that a global recession may be in the works are not new. According to Bank of America’s global fund manager survey which took place last week, investors are dumping equities amid growing speculation that the response to record high inflation rates could trigger a recession. In fact, a record high of 62% of respondents said they are overweight in cash while 52% said they are underweight in equities, a new record low.

The August inflation data will be front of mind for the Fed as they enter the monthly policy meeting next week and could be the deciding factor in the size of the rate hike.