By 
Major U.S. stock benchmarks were falling sharply Friday afternoon, with the Nasdaq Composite Index seeing the biggest decline, after an eagerly awaited inflation reading came in much hotter than expected.
How are stock indexes trading?
The Dow Jones Industrial Average
DJIA,
-2.21%
was down 770 points or 2.4%, at 31,503, with all 30 components in the red. The blue-chip gauge was down 853 points at its session low.
The S&P 500
SPX,
-2.42%
dropped almost 107 points, or 2.7%, to 3,911.
The Nasdaq Composite
COMP,
-3.03%
slumped 392 points, or 3.3%, to 11,362.
What’s driving markets?
The stock market is dropping as investors worry that surging inflation’s bigger than anticipated jump in May will prompt the Federal Reserve to become more aggressive tightening its monetary policy, potentially triggering a recession.
The consumer-price index showed U.S. inflation increased 1% in May, well above the 0.7% monthly rise forecast by economists surveyed by The Wall Street Journal. The year-over-year rate rose 8.6%, topping the 40-year high of 8.5% seen in March.
See: Consumer prices surge again, CPI shows, and push U.S. inflation rate to 8.6%
“The hotter-than-expected CPI reading is challenging the peak inflation story,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management, in a phone interview Friday. The soaring 8.6% rate of inflation seen the 12 months through May is the highest since 1981.
“We are revising our forecast to increase the probability here that we do see a hard landing” for the U.S. economy, said Roland, explaining that it’s now more likely that the Fed will be tightening into a recession as it tries to bring down the cost of living.
The consumer-price index showed the so-called core rate of inflation, which omits food and energy, rose 0.6% in May, a tick higher than expected. But the increase in the core rate over the past year slowed to 6% from 6.2%.
The Fed views the core rate as a more accurate measure of price trends, but surging food and gasoline costs are fueling a public and political outcry over inflation.
“Federal Reserve policy makers like to focus on their ‘preferred’ inflation measure, core PCE, which may decline in the next several months, but in a very real sense, most U.S. households live in a headline CPI world,” said Rick Rieder, head of the BlackRock’s global allocation investment team, in emailed comments Friday.
Read: Fed is the market’s biggest risk as stocks and bonds stumble together, says Citi
The Fed may have to tighten policy “more aggressively than markets were hoping for,” as the latest CPI reading disrupted the idea of peak inflation, according to John Hancock’s Roland. All of the S&P 500’s sectors were trading down early afternoon Friday, with the consumer discretionary sector
SP500.25,
-4.05%
being the hardest hit with a drop of around 4%, according to FactSet data, at last check.
Also see: ‘Catastrophically bad’ inflation report is boosting chances of a 75 basis point hike in June or July
The University of Michigan’s gauge of consumer sentiment fell sharply to a record low reading of 50.2, down from a May reading of 58.4. Economists polled by The Wall Street Journal had expected an June reading of 59.
Meanwhile, Americans’ expectations for overall inflation over the next year rose in June to 5.4% from 3.3% in May. Consumer expectations for inflation over the next 5 years jumped to 3.3% from 3% in the prior month.
“The surge in gasoline prices to record levels will likely continue to filter into household inflation expectations if elevated prices persist well into the summer. We expect household sentiment will remain historically depressed in the near term as inflation risks remain tilted to the upside and pocketbooks continue to feel the squeeze from widespread price pressures throughout the economy,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics, in a note.
The latest U.S. inflation data comes ahead of the Fed’s policy meeting next week.
“This was a very bad inflation report for both the White House and Fed,” wrote Edward Moya, senior market analyst for the Americas, at OANDA, in an emailed note. “The Fed’s latest mistake is that they did not act strongly to cool inflation, and they will now be forced to deliver more rate hikes as inflation is clearly not transitory and not ready to peak.”
Which companies are in focus?
Shares of Netflix Inc.
NFLX,
-4.21%
fell 4.8%, Roblox Corp.
RBLX,
-8.13%
dropped 8.9%, and eBay Inc.
EBAY,
-3.95%
was down 4.4%, with all three being among a host of internet stocks that Goldman Sachs reportedly cut to sell. Frontdoor Inc.
FTDR,
-5.19%
was also downgraded, falling 5.4%.
DocuSign Inc.
DOCU,
-24.26%
shares slumped 25% after the electronic-documents company missed on fiscal first-quarter earnings and trimmed its billings guidance.
How are other assets faring?
The yield on the 10-year Treasury note BX: TMUBMUSD10Y jumped about 12 basis points to 3.16%.
The U.S. dollar
DXY,
+0.88%
gained against a basket of rival currencies, rising 0.9%.
Crude-oil prices
CL.1,
-0.82%
pulled back, with West Texas Intermediate crude for July delivery
CLN22,
-0.82%
down 1.2% at $120.16 a barrel.
In European equities, the Stoxx Europe 600 index closed 2.7% lower Friday, bringing its weekly loss to 3.9%. London’s FTSE 100 Index fell 2.1% Friday and slid 2.9% for the week.
The Shanghai Composite
SHCOMP,
+1.42%
rose 1.4% Friday, while the Hang Seng Index
HSI,
-0.29%
edged down 0.3% and Japan’s Nikkei 225
NIK,
-1.49%
dropped 1.5%.
—Barbara Kollmeyer contributed to this report.
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