The Dow is collapsing as inflation hits 40-year high

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

That higher number fueled investor concerns 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 rate hike next week, but could decide to move higher based on the news.

“We think the Federal Reserve now has good reason to surprise markets by walking more aggressively than expected in June,” Barclays analysts wrote in a research note on Friday. We realize it’s a close call and could happen in June or July. But we are changing our forecast to demand a 75bp increase on June 15.”

The White House, meanwhile, admitted the number was “uncomfortably high,” further fueling investor fears of policy action.

“The biggest risk to consumption, employment and the economy in general is not a slowdown in organic growth, but the extent to which extreme energy/food price increases could cause central banks to push (ineffectively) against the cap, and [the economy could] essentially falling into a damaging policy error,” Rick Rieder, chief investment officer of Global Fixed Income at BlackRock, wrote in a note.

Still, Federal Reserve policymakers have historically focused on personal consumption spending, not CPI as their preferred measure of inflation.

Two-year government bond yields rose to 3% on Friday, their highest level since 2008 S&P 500 SPX and Nasdaq COMP the indices both fell about 3%.

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