Stocks drop sharply as hot inflation report points to more Fed strength, Nasdaq down 3%

Stocks fell sharply on Tuesday after the key August inflation report It came in higher than expected, hurting investor optimism about calming prices and reducing the strength of the Federal Reserve.

The Dow Jones Industrial Average fell 720 points, or 2.2%. The S&P 500 is down 2.6%, and the Nasdaq Composite is down 3.4%.

More than 480 stocks in the S&P 500 fell, with Facebook’s Meta down 5.5% and Caesars Entertainment losing 5.7%.

The August CPI report showed a higher-than-expected inflation reading. Headline inflation rose 0.1% month over month, even as gas prices fell. Core inflation rose 0.6% month over month. On an annual basis, inflation was 8.3%.

Economists polled by Dow Jones had expected a 0.1% decline in headline inflation, with a 0.3% rise in core inflation.

This report is one of the last to be seen by the Fed before the September 20-21 meeting, when the central bank is expected to present The third consecutive increase in the interest rate by 0.75 percentage points to curb inflation. An unexpectedly high August report could cause the Fed to continue its violent gains for longer than some investors expected.

The moves come after four consecutive positive sessions for US stocks, boosted in part by many investors’ belief that inflation has already peaked.

“The CPI report was unequivocally negative for stock markets. The hotter than expected report means we will face continued policy pressure from the Federal Reserve through higher interest rates,” said Matt Peron, director of research at Janus Henderson Investors. “It also pushes back whatever ‘Fed pivot’ markets have been hoping for in the near term. As we have warned over the past months, we are not out of danger yet and will maintain a defensive stance in terms of stock and sector allocations.”