Stocks looked poised to get off to a poor start on Thursday as market volatility continued. As of 8:30 a.m. ET, futures on the Dow Jones Industrial Average (^DJI -0.11%) were down 365 points to 32,900. S&P 500 (^GSPC 0.02%) futures dropped 47 points to 4,229, while Nasdaq Composite (^IXIC 0.10%) futures fell 198 points to 13,537.
Some big movers in the after-hours session Wednesday night continued to make headlines this morning, with dramatic moves in their stock prices. However, most investors focused their attention on the latest report on inflation, and the pressures on consumer prices remained a big threat to the future of the U.S. economy.
Inflation keeps going up
The February report on the consumer price index (CPI) from the Bureau of Labor Statistics showed no let-up in the pricing pressures that have plagued the U.S. economy for nearly a year now. The CPI overall rose 0.8% for the month in February. That brought the year-over-year rise in the index to 7.9%, which was the largest increase in 40 years.
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No one will be surprised that gasoline prices were a key contributor to the CPI's increase. The gasoline index within the CPI rose 6.6% in February, and it was responsible for almost a third of the CPI's overall increase for the month. Food prices rose 1%, with food-at-home prices climbing 1.4% and posting their biggest increases in nearly two years.
Food and energy prices are volatile, but even when you remove them, the core CPI rose 0.5% in February, bringing its 12-month gain to 6.4%. That was also a nearly 40-year high.
There were just a couple of signs of potential moderation in some areas. Used car prices, which have soared more than 41% since this time last year, were down 0.2% for the month. Electricity prices also fell 1.1%, making up slightly for the pain at the pump that most consumers are feeling.
However, other areas saw strong pent-up demand show up in prices. Lodging away from home rose 2.2% for the month, while the recreation index posted a 0.7% monthly increase.
How will markets react?
Economists are still trying to wrap their heads around whether inflation will prove to be a short-term phenomenon. The Federal Reserve has stopped talking about the rise in CPI as transitory, but there's still an expectation that inflation rates of 7% to 8% per year aren't something that will become the long-term norm. Most Fed officials expect CPI levels to drop a lot closer to the central bank's stated 2% target in short order, although the timeline for such predictions has been extending further into the future lately.
Yet there could be even more inflation on the way. Gasoline prices spiked yet further in early March after these February numbers had been compiled. That could add yet another big increase in the figures announced next month.
Meanwhile, investors who are trying to anticipate how various sectors will react to likely Fed interest rate hikes still face a lot of uncertainty. Banks in particular have seen a lot of volatility lately, with JPMorgan Chase (JPM 0.49%) having risen 4% on Wednesday as the prospects for higher rates seemed to stoke optimism about expanding net interest income and higher profits. Yet the bank stock was down in premarket trading on Thursday morning along with much of the rest of the sector. If short-term rates rise without long-term rates rising at least as much or more, then the impact on bank profits won't be as strong.
A lot of people will be watching the Fed's next monetary policy meeting on March 15 and 16 to see how aggressive the central bank is in fighting inflation. Maintaining a balancing act between controlling price pressures but not sending the economy into recession could be a difficult one.
