US stocks were little changed on Wednesday after the release of the August Consumer Price Index (CPI), which showed inflation rising to 3.7% year-over-year, the highest level since November 2018. However, the core CPI, which excludes food and energy prices, rose by a more modest 2.7%, suggesting that inflation may be peaking.
“The CPI report was not great, but it was also not a disaster,” said Michael Purves, chief executive officer of Tallbacken Capital Advisors. “The market is still digesting the implications of the Fed’s hawkish pivot, and it’s not clear yet how much of a reaction we’ll see from the Fed in the coming months.”
The Federal Reserve is widely expected to raise interest rates by 25 basis points at its meeting next week, and some analysts believe that the central bank could raise rates by more than that if inflation continues to rise. However, the Fed has also signaled that it is willing to be patient and see how the economy evolves before making any further rate hikes.
“The Fed is in a tough spot,” said Purves. “They need to raise rates to combat inflation, but they also don’t want to risk tipping the economy into a recession. It’s going to be a delicate balancing act.”
In other news, European stocks fell on Wednesday, as investors worried about the impact of rising inflation on economic growth. The Stoxx Europe 600 index was down 0.6% at the close.
The pound also fell to a three-month low against the dollar, as investors reacted to news that the UK economy shrank at the quickest pace in seven months in July.
Oil prices rose to their highest level since 2014, as concerns about supply disruptions outweighed worries about demand from China. Brent crude futures were up 1.5% at $79.80 a barrel.
The main focus for investors on Thursday will be the release of the minutes from the Fed’s latest meeting. The minutes will provide clues about the central bank’s thinking on inflation and interest rates.
Investors will also be watching the release of the weekly jobless claims data. The data is expected to show that the number of Americans filing for unemployment benefits fell last week.
Here are some other things to watch in the markets:
- Earnings season continues, with reports from companies including Bank of America, Goldman Sachs, and Johnson & Johnson.
- The US trade deficit is expected to widen in August.
- The European Central Bank is meeting to discuss monetary policy.