Stocks fall sharply as hot inflation report points to more aggressive Fed, Nasdaq slides 3%

Stocks fell sharply on Tuesday after a key August inflation report came in hotter than expected, hurting investor optimism for cooling prices and a less aggressive Federal Reserve.

The Dow Jones Industrial Average slid 641 points, or 2%. The S&P 500 dropped 2.4%, and the Nasdaq Composite sank more than 3%.

More than 480 stocks in the S&P 500 fell, with Facebook-parent Meta dropping 5.5% and Caesars Entertainment losing 5.7%.

The August consumer price index report showed a higher-than-expected reading for inflation. Headline inflation rose 0.1% month over month, even with falling gas prices. Core inflation rose 0.6% month over month. On a year over year basis, inflation was 8.3%.

Economists surveyed by Dow Jones had been expecting a decline of 0.1% for overall inflation, with a rise of 0.3% for core inflation.

The report is one of the last the Fed will see ahead of their Sept. 20-21 meeting, where they’re expected to deliver their third consecutive 0.75 percentage point interest rate hike to tamp down inflation. The unexpectedly high August report could lead the Fed to continue its aggressive hikes longer than some investors anticipated.

The move in futures comes after four straight positive sessions for U.S. stocks, which were bolstered in part by the belief of many investors that inflation had already peaked.

“The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” said Matt Peron, director of research at Janus Henderson Investors. “It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term. As we have cautioned over the past months, we are not out of the woods yet and would maintain a defensive posture with equity and sector allocations.”