Shares of several consumer-facing banks and finance companies fell today after a key gauge of inflation came in hotter than expected this morning, sinking the broader market. the Dow Jones Industrial Average had dropped approximately 775 points as of this writing and the Nasdaq Composite fell more than 3.5%.
Actions of PayPal (PYPL -5.93%) it had fallen nearly 6.4% as of 11:50 a.m. ET today. Artificial Intelligence Lender Actions Upstart (UPST -4.89%) traded almost 6.7% down, and shares of fargo wells (WFC -5.50%) they fell 5.8%.
Investors eagerly awaited new data from the US Bureau of Labor Statistics’ consumer price index (CPI), which tracks prices across a variety of everyday consumer goods and services. In May, the CPI rose 8.6% year over year, its highest increase since December 1981. Economists only expected an increase of 8.3%. In addition, the new data disproved the belief of some investors that inflation had peaked.
Delving deeper into the report, prices in the energy sector were up nearly 4% from the previous month and up nearly 35% year over year. Within energy, fuel and oil prices were up nearly 17% from the previous month and are now up more than 106% year over year. Another big increase was in airfares, prices for which have risen 12.6% since April. New car prices also grew 1% from April.
“It’s hard to look at the May inflation data and not be disappointed,” said John Leer, chief economist at Morning Consult, according to CNBC. “We’re still not seeing any signs that we’re free.”
This also means the Fed won’t be able to take its foot off the gas in its efforts to rein in inflation, which means making more aggressive hikes to its benchmark overnight lending rate and shrinking its balance sheet by nearly $9 trillion. Both initiatives could put pressure on share prices.
PayPal will feel the pain if prices continue to rise and put pressure on consumer finances, potentially slowing consumer spending across its platform. Upstart could see some benefit if more consumers need to go into debt to cover their monthly expenses, but the company’s investors will also have a higher cost of financing, and a recession could also increase loan defaults. The company has already lowered its revenue guidance for the year in its latest earnings report. While Wells Fargo is expected to benefit from rising interest rates like most banks, too much inflation can reduce demand for loans and also increase credit losses, especially in a recession.
The CPI report is exactly what investors were hoping not to see because it could mean inflation continues to rise, making it difficult for the Fed to engineer a soft landing for the economy.
Curiously, Citi Group Global Wealth Investments issued a note yesterday saying it believes the worst of inflation is over and consumer prices will fall in 2023.
The new CPI data is certainly interesting because it continues to show the current strength of the economy. The labor market is still strong and consumers seem to be spending due to high prices, although it looks like it might be starting to slow down a bit.
Ultimately, I think a recession is possible, but it could be a modest, short-lived recession. I’m bullish on Wells Fargo and PayPal at these levels, but I’m taking a much more cautious approach on Upstart due to several unique parts of their business model.