Dow falls more than 300 points after Fed’s favorite inflation gauge runs hotter than expected

U.S. stocks opened sharply lower Friday morning, after the Federal Reserve’s preferred inflation measure came in with a hotter-than-expected January reading.

What’s happening
  • The Dow Jones Industrial Average
    dropped 325 points, or 1%, to 32,831.

  • The S&P 500
    was down 45 points, or 1.1%, at 3,967.

  • The Nasdaq Composite
    dropped 164 points, or 1.4%, to 11,427.

Stocks rose in choppy trading Thursday, with the S&P 500 snapping a four-day losing streak. Major indexes were on track for weekly losses.

What’s driving markets

The personal consumption expenditure, or PCE, price index showed the cost of U.S. goods and services jumped 0.6% in January, its biggest rise since last summer and another sign that stubbornly high inflation is taking its time to return to low prepandemic levels.

The annual increase in prices rose to 5.4% from 5.3% in December — the first uptick in seven months. The PCE index touched a 40-year high of 7% last June.

The more closely followed core index, which is the Fed’s preferred inflation measure, also rose 0.6% last month. Analysts has forecast a 0.5% gain. The increase in the core rate of inflation in the past 12 months moved up to 4.7% from 4.6.%.

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The data was seen cementing expectations the Federal Reserve will continue lifting its key interest rate above 5% in its effort to bring down inflation.

“Reaccelerating price pressures coupled with a still-strong labor market that is restoring incomes and is supporting demand will keep the Fed on track to hike rates further over coming meetings, to a peak rate that could be higher than officials expected in December,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.

There’s also data to come on new-home sales, and the final reading of the University of Michigan’s consumer-sentiment index. That’s alongside a basketball team-sized list of Fed speakers: Fed Governors Philip Jefferson and Christopher Waller, and regional presidents Loretta Mester, James Bullard and Susan Collins.

In an interview with CNBC ahead of the data, Mester said she wouldn’t “prejudge” whether the Fed lift interest rates by half a percentage point at its March meeting after its Feb. 1 quarter-point hike. Mester last week said she had called for a half-point hike at that earlier meeting.

Overseas, incoming Bank of Japan Gov. Kazuo Ueda said it would be appropriate to continue easing — for now. “Our colleagues in Tokyo judged that Ueda’s key views on economic conditions, the inflation outlook, the current monetary policy stance and transmission mechanism all differed little from those of [current Bank of Japan Gov. Haruhiko] Kuroda. In order to avoid generating unwelcome market volatility, of course, that was probably Ueda’s intention,” said economists at Daiwa Europe in a note to clients.

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Companies in focus
  • Carvana Co.
    said it plans to complete a $1 billion reduction in operating costs by the second quarter of 2023 as the online car-sales company seeks to right itself without resorting to layoffs, after it snapped a streak of winning years in 2022. Shares fell 14%.

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