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So much for the hope U.S. inflation had come off the boil this summer: A surprisingly hot reading for price increases in August sent stocks tumbling on Tuesday amid concerns the U.S. Federal Reserve will continue to raise interest rates aggressively.

Major stock market indexes, which had been rising in recent trading sessions as inflationary pressures appeared to ease, are now back to reflecting a continuing battle with those pressures and economic uncertainty.

Monthly U.S. consumer prices unexpectedly rise in August; core inflation picks up

The Dow Jones Industrial Average fell 1276.37 points, or 3.9 per cent, marking its worst one-day sell-off in more than two years. Canada’s S&P/TSX Composite Index fell nearly 1.8 per cent.

Bond yields jumped and gold prices fell, battering typical investing havens when stocks turn volatile. And the Canadian dollar slipped below 76 US cents, touching its lowest level since November 2020.

The U.S. economic news at the centre of this maelstrom: The consumer price index (CPI), a broad measure of inflation, showed prices up 8.3 per cent in August from a year earlier.

The core inflation rate, which doesn’t include volatile energy or food, was 6.3 per cent in August. That was up from 5.9 per cent in July and well above economists’ expectations, dashing expectations of moderating price increases.

This means the Fed and other central banks will likely turn even more aggressive in their determination to wrestle inflation back to about 2 per cent, even if they hurt economic activity.

“Americans saved on gasoline, but paid more for just about everything else in August. The result was that core inflation was red hot,” Katherine Judge, an economist at CIBC World Markets, said in a note.

Following the CPI release, Ms. Judge said she isn’t ruling out the possibility the Fed could raise its key interest rate by a full percentage point, or 100 basis points, at its monetary policy meeting next week, compared with widely-held expectations for a 75-basis-point hike.

What’s more, she said the Fed could ultimately raise its rate to a high above 4 per cent this year, up from the current range of 2.25 per cent to 2.5 per cent.

“While softer economic reports still suggest that the Fed will have to pause by year end, either a 100 basis point move in September, or a peak of 4.25 per cent, are more in play than we thought ahead of these data,” Ms. Judge said.

The market’s reaction suggests renewed investor angst over the possibility of a recession and the impact it would have on corporate profits and stock valuations.

Though stocks had declined sharply in the first half of the year on similar concerns, leaving the S&P 500 Index down as much as 24 per cent by June, major indexes had been recovering on the belief that inflation was subsiding. Between mid-June and Aug. 16, the S&P 500 rebounded by 17.4 per cent.

Tuesday’s declines were widespread, weighing on all sectors of the S&P 500, but economically sensitive stocks were hit particularly hard.

U.S. financials fell 3.8 per cent and industrials fell 3.8 per cent. The tech-heavy Nasdaq Composite Index fell 5.2 per cent, with Apple Inc. down 5.9 per cent.

In Canada, Toronto-Dominion Bank fell 2.3 per cent and Shopify Inc. fell 5.8 per cent.

The yield on the 10-year U.S. Treasury bond rose above 3.4 per cent, or close to its recent multiyear high of 3.48 per in mid-June (bond yields and bond prices move in opposite directions), which signals market expectations that the Fed’s battle with inflation isn’t over.

“Stickier and broader based inflation argues that the Fed has more work to do, and the odds of a hard landing for the U.S. economy continue to rise,” Tiffany Wilding and Allison Boxer, economists at Pacific Investment Management Co., or PIMCO, the fixed-income asset manager, said in a note.

Still, some observers believe the inflationary threat will subside.

Paul Ashworth, chief North America economist at Capital Economics, said the August CPI reading does not line up with evidence of price pressures easing in areas such as rent, health insurance and used vehicles.

“We can see disinflation everywhere except in the official CPI statistics,” Mr. Ashworth said in a note.

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