Dow tumbles more than 700 points after hot inflation report

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Stocks slumped on Tuesday after a government report showed that inflation last month remained stubbornly high, a setback for investors betting that the Federal Reserve could cut its benchmark interest rate as soon as March.

The Dow Jones Industrial Average fell more than 700 points in afternoon trade before regaining ground to close down 525 points, or 1.4%, at 38,273. The S&P 500 dropped 1.4% on the day, while the tech-heavy Nasdaq Composite index lost 1.8%.

Financial markets have steadily climbed since October on expectations that the Fed was done pushing up borrowing costs as it seeks to curb inflation, with some Wall Street analysts predicting that the central bank could cut its short-term rate as early as March. But investor sentiment is shifting amid the U.S. economy’s strong economic performance and efforts by Fed officials to tamp down expectations of an imminent cut.

“A market that forcefully expected earlier easing — fortified by a series of rate cuts throughout the year — has had to digest not just a barrage of consistent Fedspeak, but the stark reality that the Fed can still not declare victory on its long campaign to quell inflation,” Quincy Krosby, chief global strategist for LPL Financial, said in an email.

Consumer prices rose 3.1% in January from a year ago, the Labor Department said on Tuesday. Although that is cooler than in December, economists had expected prices to rise at a 2.9% pace from a year ago. Job growth around the U.S. also topped forecasts last month, a sign that economic growth may remain too vigorous to bring inflation down closer to the Fed’s 2% target rate.

Fed Chair Jerome Powell in January said the Fed would remain cautious in easing interest rates, saying that “inflation is still high … and the path forward is uncertain.”

Although some economists have raised concerns that inflation could re-accelerate, most analysts continue to expect a gradual slowdown in price increases.

“Until proven otherwise, the longer-term cooling inflation trend is still in place,” said Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley. “The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”

Wall Street analyst Adam Crisafulli of VitalKnowledge thinks a Fed move to ease rates remains a matter of when, not if. The “narrative that’s been propelling stocks since [November] remains in place,” he said in a note to investors, pointing to the ongoing slowdown in inflation and health corporate earnings.

The Fed started boosting rates in March of 2021 in a bid to temper the hottest inflation in four decades. Economists say that effort, which involved 11 consecutive rate hikes, has to date largely succeeded in lowering costs, although millions of Americans continue to feel the impact of higher prices for food, rent, and other products and services.

—The Associated Press contributed to this report.