What happened
Ford Motor (F -1.92%) stock sank 4.2% within minutes of the market's opening Tuesday, reversing its gains from the previous day as the markets digested the latest inflation data and tried to make sense of what it could mean for the economy and automotive companies that are highly sensitive to inflation and interest rates.
So what
The S&P 500 plunged today after the August Consumer Price Index (CPI) unexpectedly rose 0.1% versus July, despite a fall in gasoline prices. Economists expected a 0.1% drop in the CPI for August. Also, although inflation dropped year over year in August, it still remains sky-high at 8.3%, significantly overshooting the Federal Reserve's annual target inflation of 2%.
This inflation report was crucial as the Federal Reserve heads for a meeting next week to announce its next interest rate hike. Stubborn inflation now means the Fed will most likely hike interest rates by a big margin yet again next week – economists now see a 75-basis point hike imminent – and in doing so, refuel the chances of the economy slipping into a recession.
High inflation and rising interest rates are real problems for auto stocks like Ford. Several automakers have been forced to increase the prices of their vehicles in recent months to offset surging input costs, which has contributed to persistently high inflation.
Even as cars become costlier, rising interest rates would also mean higher borrowing costs for price-conscious consumers. It's a double whammy that's bound to hit car sales, with things getting much worse if the economy slows down. The average interest rate on a five-year loan for a new car right now is nearly 5.08%, according to Bankrate.com. Three months ago, it was 4.56%.
Now what
Ford is already feeling the heat of inflationary pressures. At an analyst conference in June, Ford CFO John Lawler even stated how rising input costs had rendered its all-electric Mustang Mach-E unprofitable. Ford has also announced a series of layoffs in recent weeks in a bid to cut costs and boost cash flows at its legacy fuel-burning vehicles business to fund its ambitious electric vehicles (EV) growth plans.
No matter what Ford does for growth, though, today's inflation report is a stark reminder of the hurdles that could get in Ford's way.
