Consumer Inflation Terrorizes US Investors

NEW YORK (Reuters) – Evidence that red-hot inflation is seeping into the economy is sending a chill through investors after major U.S. retail groups showed people are cutting back on buying bigger items to make ends meet.

Investors wiped nearly 25% off Target’s stock value Wednesday after its profit was cut in half as it had to offer discounts on larger items, and Walmart has fallen more than 17% since reporting weak results early Tuesday.

Target’s results showed consumers spending more on groceries and household staples rather than high-margin optional items, while Walmart showed shoppers shifted to buying staples that offer lower markups.

The turmoil came a day after Federal Reserve Chairman Jerome Powell pledged that the U.S. central bank would raise interest rates as much as necessary to end a pickup in inflation.

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“Retailers are starting to reveal the impact of eroding consumer spending power,” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, on the same day his firm forecast a mild recession around year-end through early 2023.

“Consumer spending power is eroding at a faster pace than it was a month or two ago. We think that pace is going to accelerate further,” he said.

Wednesday’s selloff caused the S&P;500 to close down 4% on the day, 17.7% year-to-date and 18.2% from its record close on Jan. 3. [.N]

The benchmark consumer discretionary index lost 6.6% in its biggest one-day selloff since March 2020 and has lost 30.8% so far in 2022, putting it on track for its weakest year since 2008.

While investors have long been concerned about inflation, the latest results pile on concerns about the impact of inflation on the consumer, said Ryan Detrick, chief market analyst at LPL Financial.

However, the stock selloff came a day after data showed U.S. retail sales rose sharply in April as consumers bought more motor vehicles against a backdrop of improving supply, along with higher spending at restaurants, despite high inflation, souring consumer confidence and rising interest rates.

(Additional reporting by Svea Herbst-Bayliss in Boston and Lewis Krauskopf in New York, Medha Singh in Bengaluru; editing by Megan Davies and Chris Reese, translated by Jose Munoz in the Gda?sk newsroom)