ASX set to slip as Wall Street retreats on inflation report

Wall Street is lower after a report suggested inflation may not be slowing as quickly and as smoothly as hoped.

The S&P 500 was 0.5 per cent lower in early-afternoon trading, while yields shot higher in the bond market as investors braced for the Federal Reserve get firmer on interest rates to combat inflation. The Dow Jones was down 0.4 per cent while the Nasdaq composite was 0.1 per cent higher. The Australian sharemarket is set to open lower, with futures at 5am AEDT pointing to a fall of 16 points, or 0.2 per cent, at the open. The ASX added 0.2 per cent on Tuesday.

The report was so hotly anticipated because inflation and the Federal Reserve’s response to it have been at the centre of Wall Street’s struggles for more than a year. Inflation has been cooling since a summertime peak, and investors are trying to guess how quickly and smoothly a decline could happen to the Fed’s 2 per cent target.

Tuesday’s report showed that inflation slowed to 6.4 per cent in January from its peak of 9.1 per cent in June. The hope on Wall Street has been for a continuing slowdown to get the Federal Reserve to pause its hikes to interest rates and perhaps begin contemplating cuts to them.

High rates can drive down inflation but also raise the risk of a severe recession and hurt investment prices. The Fed has already hiked its key short-term rate to a range of 4.50 per cent to 4.75 per cent, up from virtually zero a year ago.

Nearly half of January’s month-over-month inflation also came from an area where Fed chair Jerome Powell has said he sees easing pressure in the pipeline: housing and other shelter-related prices.

But on the downside for markets, the improvement in inflation wasn’t by as much as economists expected. That could encourage the Fed to be more aggressive on interest rates than it’s been saying. The Fed has indicated it envisions at least a couple more increases before holding rates at a high level for a while.

“While inflation is heading in the right direction, there is a long and bumpy road ahead to price stability,” said Andrew Patterson, senior economist at Vanguard.

Even after ignoring the effects of prices for food and energy, which can swing more sharply than others, what’s called “core inflation” was still slightly higher than expected last month.