Dow Stumbles More Than 700 Points After High Inflation Report—As Tariffs Loom

 

Inflation has struggled to come down to its pre-pandemic norm, and the Federal Reserve doesn’t expect that to change in 2025

Stocks faltered Friday after the Federal Reserve’s favored inflation metric remained stubbornly high in February, and as President Donald Trump’s tariffs throw a new curveball to policymakers.

Key Facts

Annual inflation was 2.8% last month, according to the core personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation as it excludes price changes in the more volatile food and energy categories and it’s more comprehensive than its rival consumer price index (CPI).

Economists expected core PCE inflation of 2.7%, according to median forecasts tracked by FactSet, while Fed Chairman Jerome Powell said last week the U.S. central bank anticipated a 2.8% year-over-year increase.

Core PCE inflation is still far above central bankers’ target of 2%, a threshold it has not met since February 2021.

The PCE index increased 0.3% from January to February and the core measure rose by 0.4%, adjusting for seasonality, higher than economist forecasts of a 0.3% month-over-month increase.

Wall Street responded to the month-over-month inflation uptick negatively, as the Dow Jones Industrial Average slipped 1.8%, or about 715 points, while the S&P 500 and tech-heavy Nasdaq dropped 2% and 2.7%, respectively.

Among the hardest hit names were shares of big technology companies thought to be more vulnerable to a rockier economy, as shares of Apple, Amazon, Google and Microsoft all fell more than 2.6%.

Big Number

More than 3,400. That’s how many points the Dow is down from its December record, equating to an 8% decline.

Crucial Quote

“It looks like a ‘wait-and-see’ Fed still has more waiting to do,” Morgan Stanley Wealth Management economic strategist Ellen Zentner wrote in emailed comments, noting the stubborn inflation reading means the interest rate cuts long yearned for by investors may be further down the road. The S&P is down more than 3% since Tuesday as the latest round of economic data and tariffs spurn a risk-off shift.

What We Don’t Know

How President Donald Trump’s often shifting tariffs will affect inflation. Economists mostly agree the import taxes will at least temporarily increase consumer prices, though the extent remains to be seen considering Trump has yet to reveal what he’s teased as his most comprehensive trade policy yet, reciprocal tariffs. Fed staff expect core PCE inflation to come in at 2.8% by December, according to median quarterly economic projections released last week, up from a 2.5% forecast last quarter for the end of 2025 and a 2.2% projection a year ago. A “good part” of the higher inflation expectations come from tariffs, Powell said last week.

Key Background

Overall PCE inflation was 2.5% in February, matching the Fed’s and consensus economists’ matching projections of 2.5%. Core PCE inflation peaked at a four-decade high of more than 5% in 2022, as prices surged globally as several inflationary pressures peaked simultaneously, including COVID-19 related supply chain snags and soaring energy prices following Russia’s invasion of Ukraine. Other than the most glaring consequence of bringing higher everyday price tags for consumers, sticky inflation has also had the undesirable effect of keeping interest rates higher, as the Fed typically keeps borrowing costs elevated as a method to cool inflation. The Fed has yet to declare victory on inflation, and has kept the federal funds rate steady at 4.25% to 4.5% since December, higher than it ever stood from 2008 to 2022. Americans saved 4.6% of their disposable income in February, according to the Commerce Department’s personal saving rate metric released Friday, below the 5.7% average savings rate from the turn of the millennium through January.