The Bad Inflation News Continues

The so-called core PCE index, which excludes volatile food and energy prices, rose 4.9% in August from a year earlier, which was up from 4.7% in July. Worse, core prices rose sharply on the month at 0.6%, up from flat in July. If the Fed was looking for a reprieve, or a downward inflation trend that offered some reason for slowing its rate increases, it wasn’t in the Friday date.

All of this weighed heavily on financial markets, with equities taking another header. The Dow Jones Industrial Average fell another 500 points, or 1.71%, and is now down to 28726. The Dow wrapped up its third straight quarter of declines, the worst in the first nine months of a calendar year since 2002. So much for the summer sucker’s rally.

Bond yields also rose again, with the 10-year Treasury note moving back above 3.8% on the inflation news. Bond prices have been mauled this year, but there’s little sign of relief short of a recession.

The risk of financial casualties is also growing amid the Fed’s sharpest move upward in interest rates since the 1980s. Like the British pension funds that were exposed this week, other market players were encouraged by a decade of easy money to make bets that could come a cropper.

The market is delivering a harsh verdict on the costs of inflation, though not as harsh as the harm inflation is doing to family budgets. The spending decisions of the Biden Administration and Democratic Congress, combined with a Fed that was too easy for too long, have done great economic damage, and the sad truth is that the reckoning was always going to be painful.