US stocks closed the week with mixed results as investors weighed the implications of the latest inflation data for the Federal Reserve’s monetary policy. The consumer price index (CPI) for July came in lower than expected, easing some concerns about runaway inflation. However, the producer price index (PPI) for July was higher than anticipated, suggesting that inflationary pressures are still building up in the economy.
CPI shows inflation cooling down in July
The CPI, which measures the changes in the prices of goods and services purchased by consumers, rose 0.5% in July from June, and 5.4% from a year ago. Both figures were slightly lower than the consensus estimates of 0.6% and 5.5%, respectively. The core CPI, which excludes food and energy prices, increased 0.3% month-over-month and 4.3% year-over-year, both below the forecasts of 0.4% and 4.4%, respectively.
The CPI report showed that some of the factors that drove inflation higher in previous months, such as used car prices, airfares, and hotel rates, moderated or declined in July. This supported the Fed’s view that inflation is largely transitory and driven by supply bottlenecks and pent-up demand due to the pandemic recovery. The lower-than-expected CPI also reduced the odds of the Fed tapering its asset purchases or raising its interest rates sooner than expected.
PPI shows inflation heating up in July
The PPI, which measures the changes in the prices of goods and services sold by producers, rose 1.0% in July from June, and 7.8% from a year ago. Both figures were higher than the consensus estimates of 0.6% and 7.3%, respectively. The core PPI, which excludes food, energy, and trade services prices, increased 0.9% month-over-month and 6.2% year-over-year, both above the forecasts of 0.5% and 5.6%, respectively.
The PPI report showed that inflationary pressures are still building up in the economy as producers face higher costs for raw materials, labor, transportation, and other inputs. These costs could eventually be passed on to consumers, leading to higher inflation in the coming months. The higher-than-expected PPI also increased the risk of the Fed tightening its monetary policy sooner than expected to prevent inflation from becoming persistent or unanchored.
US stocks react to inflation data
US stocks reacted differently to the inflation data on Friday, with some sectors benefiting from the lower CPI and others suffering from the higher PPI. The S&P 500 index edged down 0.1%, ending the week with a slight gain of 0.2%. The Dow Jones Industrial Average rose 0.3%, ending the week with a modest loss of 0.2%. The Nasdaq Composite fell 0.7%, ending the week with a notable loss of 1.1%.
Some of the sectors that performed well on Friday were consumer discretionary, utilities, real estate, and health care, which tend to benefit from lower interest rates and inflation expectations. Some of the sectors that performed poorly on Friday were energy, materials, industrials, and financials, which tend to suffer from higher input costs and inflation expectations.