U.S. stocks slide as prices of food, clothes, cars spike amid inflation worries

Inflation worries rattled Wall Street Wednesday, pulling the Dow Jones Industrial Average more than 680 points lower and putting the major stock indexes on track for their worst week in more than six months.

All three major U.S. stock indexes were deep in negative territory in the wake of the Labor Department's April consumer prices report, which showed the biggest rise in nearly 12 years.

The report, which measures the prices U.S. consumers pay for a basket of goods, was hotly anticipated by market participants who have grown increasingly worried over whether current price jumps will defy the U.S. Federal Reserve's reassurances by morphing into long-term inflation.

But pent-up demand from consumers flush with stimulus and savings is colliding with a supply drought, sending commodity prices spiking, while a labour shortage drives wages higher.

"The argument is whether this bout of inflation is transitory or here to stay," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Va. "I think it's here to stay until you see labour costs and commodity costs mitigate some." 

The S&P 500 finished the day down 89.06 points, or 2.1 per cent, its biggest one-day drop since late February. The Dow fell 681.50 points, or two per cent, the worst decline for the blue chip index since late January. And the Nasdaq gave up 357.75 points, or 2.7 per cent. It was the tech-heavy index's largest pullback since mid-March.

A worrisome bout of inflation struck the U.S. economy in April, with consumer prices surging 0.8 per cent and the year-over-year increase reaching its fastest rate since 2008.

Used car and truck prices surge

Wednesday's report from the Labour Department indicated that the prices consumers pay for everything from food and clothes to new cars rose at a faster pace than last month's 0.6 per cent rise.

And over the past 12 months, prices are up 4.2 per cent — the fastest rise since a 4.9 per cent gain in the 12 months that ended in September 2008. Excluding volatile food and energy, core inflation jumped 0.9 per cent in April and three per cent over the past 12 months.

April's sharp increase in inflation was led by a record 10 per cent surge in the price for used cars and trucks. Motor vehicle production has been hampered by a global semiconductor shortage, boosting demand for used automobiles.

While the latest reading on inflation was hotter than expected, the market shouldn't be too surprised about it rising, said Jeff Buchbinder, equity strategist at LPL Financial. The prevailing sentiment is that rising inflation will be temporary, though "it's too early to say whether these higher levels are going to be sustained," he said.

Inflation numbers high in Canada

In Canada, the most recent inflation numbers were high, due in large part to a plunge in prices a year ago, when the pandemic was in its early stages.

Statistics Canada said in April that the consumer price index in March was up 2.2 per cent compared with a year ago.

The increase compared with a 1.1 per cent year-over-year increase in February, which was then a pandemic-era high.

The inflation rate is the biggest factor that the Bank of Canada considers when setting its benchmark interest rate. The bank likes to see an inflation rate of between one and three per cent.

All things being equal, the bank cuts its rate to stimulate the economy when the inflation rate is too low, and it raises its benchmark lending rate to cool things down when inflation is too high.