Dow tumbles as America's prices keep rising

The Federal Reserve has never raised interest rates by a full percentage point at a single meeting — going back to at least 1990, when the Fed began publishing data on meeting by meeting interest rate decisions. But that may change later this month following another hot inflation report.

Consumer prices unexpectedly rose slightly in August from July and were up 8.3% over the past 12 months, a bigger jump than expected. As such, futures that track potential interest rate moves are now pricing in roughly 20% odds of a 100 basis point hike at the Fed's September 21 meeting.

Of course, this means that the market still largely expects another three-quarters of a point increase, or 75 basis points. That would be the Fed's third straight hike of that size, following similarly supersized increases in June and July.

But prior to the Consumer Price Index report Tuesday, investors were expecting a nearly 9% chance of a mere half-point increase. The hope was that inflation pressures would begin to cool more rapidly, making the need for more large rate hikes less necessary.

So much for that.

Investors do not like what they're seeing this morning, after a key inflation report showed prices continued to rise even as gas prices have tumbled for three straight months.

That means, despite historic, economy-damaging rate hikes from the Federal Reserve, the US central bank still does not have control of inflation. Suddenly, expectations have shifted from a wind-down in rate hikes to a ramp-up -- perhaps with the Fed raising rates by a full percentage point later this month. That hasn't happened in the Fed's modern era.

Dow futures tumbled 400 points, or 1.4%.

S&P 500 futures fell 1.8%.

Nasdaq futures were 2.4% lower.

Core CPI, which strips out the more volatile categories like food and gasoline, measured 6.3% in August, up from 6.2% in July.

Still, inflation remains painfully high for many Americans, especially those with little wiggle room in their monthly budgets. Annual price gains are a far cry from where they were 18 months ago and from the Federal Reserve's target inflation rate of 2%.

"This is a fight we cannot, and will not, walk away from," Fed Governor Christopher Waller said last week, underscoring the central bank's laser focus on hitting its 2% goal.

The Fed has been tightening its monetary policy in recent months to help rein in the highest inflation in four decades, implementing back-to-back, super-sized rate hikes of 75 basis points.

Tuesday's report — especially core CPI — will be scrutinized by the Fed ahead of its policymaking meeting next week.

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US inflation cooled off in August for the second-straight month but remained stubbornly high, according to data from the Bureau of Labor Statistics released Tuesday.

The Consumer Price Index, which measures a basket of consumer goods and services, showed prices were up 8.3% year on year, a slowdown from the 8.5% gain in July and the 9.1% spike in June. The last time the headline CPI rate declined in consecutive months was the first part of 2020.

On a monthly basis, consumer prices rose 0.1% from July.

The slower pace of annual price hikes comes alongside a significant drop in gas prices, which have come down from record highs set in June.

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Two big names on Wall Street have sounded alarm about deflation recently, arguments that don't appear to be holding up after Tuesday's inflation report. 

Tesla CEO Elon Musk recently tweeted that "a major Fed rate hike risks deflation."

Musk's tweet came after Ark Invest CEO Cathie Wood also warned about deflation on Wednesday. "The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation," she said.

Falling prices can indicate weak demand, and consumer spending is a big portion of the economy. Markets are skittish that the Fed's actions — which take a while to feed through the system — could overshoot, sending the US economy into a prolonged and deep recession.

Deflation can prompt the opposite of what we've seen recently — a downward spiral in jobs and wages as companies cut back production and lay off staff.

But that doesn't seem to be happening yet for anything except gas prices. We can breathe a sigh of relief ... on that front.

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