What happened
Car stocks are taking it on the chin today, and General Motors (GM 0.09%) is no exception. The company's stock is reeling as auto investors worry that sky-high inflation and the Federal Reserve's aggressive interest rate hikes could put too much pressure on the U.S. economy.
The automotive stock was down by 7.6% as of 2:34 p.m. ET.
So what
Auto stocks were falling with the broader market today as investors grew increasingly concerned about stubbornly high inflation, despite moves by the Federal Reserve to bring it down.
Image source: Getty Images.
A report released late last week showed that the consumer price index rose by 8.6% in May as prices for everything from fuel to food and shelter skyrocketed. The Fed has already implemented multiple interest rate hikes in an effort to bring down inflation, but the report proves that doing so will be harder than expected.
That's bad news for General Motors and other automotive companies because it means rising costs could eventually cut into their earnings. GM and its peers are already dealing with higher costs for materials and supply chain shortages, particularly for semiconductors.
Persistently high inflation will not only make some of those problems worse, but it will also keep some buyers from making new car purchases.
GM said on its first-quarter earnings call back in April that, despite rising costs and supply chain issues, it will still produce 25% to 30% more cars this year than it did last year. But investors appear more pessimistic than GM's management, in light of the recent inflation report.
Now what
While other companies are experiencing problems related to higher costs and stubborn inflation, automotive companies could be particularly vulnerable to the economic consequences.
If inflation stays too high for too long, consumers will hold off on making new car purchases. And if the Federal Reserve manages to get inflation under control with continued aggressive rate hikes, then it could result in a significant slowdown of the economy.
Neither is good for auto sales, which means that GM investors should keep a close eye on the company's upcoming quarterly results -- which are expected late next month -- to see if there are any changes to management's strategy.
