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The Dow falls nearly 800 points as inflation hits 40-year high | CNN Business

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CNN Business

The Dow

dropped more than 700 points on Friday morning after a key inflation report missed estimates and showed a higher-than-anticipated increase in the price of consumer goods.

The May consumer price index rose 8.6% year-over-year, its highest level since 1981. Economists had forecast an 8.3% increase.

That higher number further stoked investors’ worries about a possible economic downturn and an increase in interest rate hikes by the Federal Reserve. The central bank is expected to announce a half-percent interest rate hike next week, but it could decide to go higher based on this news.

“We think the US central bank now has good reason to surprise markets by hiking more aggressively than expected in June,” wrote Barclays analysts in a research note on Friday. We realize it is a close call and that it could play out in either June or July. But we are changing our forecast to call for a 75bp hike on June 15.”

The White House, meanwhile, conceded that the number was “uncomfortably high,” further stoking investor fears of policy action.

“The major risk to consumption, employment, and the economy overall, isn’t an organic growth slowdown, but the extent to which extreme energy/food price increases could cause central banks to push (ineffectually) against the string, and [the economy could] essentially fall into a damaging policy mistake,” wrote Rick Rieder, chief investment officer of Global Fixed Income at BlackRock in a note.

Still, Federal Reserve policymakers have historically focused on Personal Consumption Expenditures, not CPI as their preferred inflation measure.

The 2-year Treasury yield grew to 3% on Friday, its highest level since 2008. The S&P 500

and Nasdaq

indexes were both down around 3%.

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