Speculation that inflation might have peaked earlier this year died abruptly with this morning's release of the Labor Department's latest consumer price index (CPI). And what the data showed was that prices were still rising last month.
Specifically, the CPI surged 8.6% year-over-year in May, the fastest pace since December 1981. The sharp rise in consumer inflation was broad-based, but annual increases were particularly stunning in both gas prices (+50.3%) and groceries (+11.9%). On a month-over-month basis, the consumer price index was up 1%, compared to April's 0.3% rise in prices. Both figures were higher than what economists were expecting.
Also released this morning was the University of Michigan's preliminary consumer sentiment index for June, which arrived at 50.2 – down 14.2% from May, the lowest value this decades-old indicator has reported. According to the report, 46% of survey respondents pointed to inflation for their negative outlook toward the economy, up 38% from last month.
"The crash in sentiment means that consumers are more and more worried about future economic conditions," says Jeffrey Roach, chief economist for independent broker-dealer LPL Financial. "We need to listen to what consumers say but more importantly, we need to watch what consumers do. We do expect a slowdown in consumer spending as inflation and uncertainties weigh heavily on sentiment."
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The reports were met with sharp selling on Wall Street. All 11 sectors finished in the red, with consumer discretionary (-4.0%) and technology (-3.8%) suffering the biggest drops.
As for the major indexes, the Nasdaq Composite slid 3.5% to 11,340, the S&P 500 Index shed 2.9% to 3,900 and the Dow Jones Industrial Average skidded 2.7% to end at 31,392.
Other news in the stock market today:
We'll get a glimpse on how the Federal Reserve will respond to today's red-hot inflation update next week, with the central bank slated to unveil its latest policy decision Wednesday afternoon.
"From a Fed perspective, the chase continues, and more aggressive Fed measures will likely be needed to catch up to runaway inflation," says Charlie Ripley, senior investment strategist for Allianz Investment Management.
"Whether this translates to more aggressive hikes this summer, or a continuation of 50 basis point [a basis point is one-one hundredth of a percentage point] hikes this fall is the option for the Fed, but the overall reality for the Fed is that inflation is not under control, and they have their work cut out for them in the coming months," Ripley adds.
We've mentioned several times in this space how investors can protect portfolios against inflation. For example, gaining exposure to firms with pricing power or scooping up Wall Street's best dividend stocks are two ways to help mitigate the effects of red-hot inflation on their portfolio.
Investors can also drill down on sectors that are typically considered more "inflation-proof" than others – namely, healthcare, consumer staples, utilities and real estate. Here, we've selected some of the top stocks from each of these sectors to create a mini-portfolio that can stand up against higher prices. Take a look.
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