Inflation’s Break Above 3% Could Force the Fed to Hike Rates—And That’s Bad for Stocks

The core Personal Consumption Expenditures Price Index (PCE) rose for two consecutive months, reaching an annualized rate of 3.1%. The core PCE has not broken above 3% on an upward trend since April 2021. Persistent inflation above 3% could force the Federal Reserve to raise interest rates instead of continuing rate cuts. The Federal Reserve may reverse its accommodative monetary policy due to renewed inflationary pressures. Rising interest rates increase borrowing costs for companies and reduce corporate earnings. Higher interest rates act as a drag on consumer spending, which negatively impacts corporate revenues. The S&P 500 declined more than 20% during the Fed’s previous rate-hiking cycle, entering bear market territory. If the Fed hikes rates again, the stock market could face similar or more severe downward pressure. The S&P 500 has already fallen 5% from its recent all-time high as investors adjust expectations.