What happened
Shares of several popular tech stocks fell today after new inflation data showed that inflation may not have fallen as fast as investors thought it would in August. The Nasdaq Composite had dropped more than 4% as of this writing.
Shares of the buy now, pay later (BNPL) company Affirm (AFRM 10.23%) traded more than 9% lower as of 11:32 a.m. ET today. Shares of the digital bank SoFi (SOFI 0.14%) traded 7% lower, and shares of the artificial intelligence lender Upstart (UPST 13.24%) were also down more than 9%.
So what
Earlier this morning, the U.S. Bureau of Labor Statistics (BLS) reported the latest August data from the Consumer Price Index (CPI), which tracks the prices on a basket of daily consumer goods and prices. Investors use the CPI as one way to gauge inflation.
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In August, the CPI ticked up 0.1% from July and came in 8.3% higher on a year-over-year basis. Economists had been projecting the CPI to decline by 0.1% from July and to come in 8% up year over year.
The higher-than-expected report comes despite the fact that energy prices fell 5% in August. Within energy, gasoline prices fell 10.6%. But other prices remained elevated -- and in some cases, rose. Medical care services rose 0.8% from July, the largest monthly increase in six months. Shelter prices also rose 0.7% in August, which is also the category's largest monthly increase since February, largely due to high rent prices.
"Today's CPI reading is a stark reminder of the long road we have until inflation is back down to earth," said Mike Loewengart of Morgan Stanley's Global Investment Office, according to CNBC. "Wishful expectations that we are on a downward trajectory and the Fed will lay off the gas may have been a bit premature."
The CPI report essentially confirms that the Federal Reserve will likely hike interest rates by 0.75% at its upcoming meeting later this month. That would be the third such move in a row by the Fed.
Rising interest rates have really hurt tech stocks this year because they make the cost of doing business more expensive and the cost of debt higher. They could ultimately lead to slower growth and less profitability, which would ultimately decrease the future value of cash flows.
For high-flying tech stocks like Affirm, SoFi, and Upstart that traded at astronomical valuations last year, there was very little margin for error, so once it became clear the Fed would raise rates intensely, these stocks likewise sold off intensely.
Higher rates have also been a headache for Upstart in terms of funding loan growth. Investors have been less willing to fund and purchase Upstart's loans due to a higher cost of funding and a more uncertain economic outlook. Affirm has also seen its loan loss rates increase this year as stimulus programs have wound down and rates have risen.
Now what
The potential for inflation to last longer and rates to keep climbing for longer is the exact opposite of what tech investors were hoping to glean today from the CPI report.
For the time being, I am continuing to steer clear of Upstart and Affirm, because rising rates could continue to wreak havoc on their business models.
They will impact SoFi as well, but likely to a lesser extent, because the digital bank lends to a higher-quality loan base that should be more resilient in a more severe recession. Additionally, as a bank, SoFi should see some benefit from higher rates because it can charge more interest on loans and has more stable funding sources to support loan growth.
