Dow falls more than 600 points as hot inflation report points to more aggressive Fed

Wall Street's main indexes opened sharply lower on Tuesday after data showed monthly U.S consumer prices unexpectedly rose in August, cementing bets of a third straight 75-basis-point rate hike from the Federal Reserve next week.

The Dow Jones Industrial Average slid 641 points, or 2%. The S&P 500 dropped 2.4%, and the Nasdaq Composite sank more than 3%.

The Labor Department's consumer price index (CPI) report showed monthly CPI rose 0.1% in August from July, against expectation of a 0.1% contraction. On a year-on-year basis it increased by 8.3%, while economists were anticipating a rise of 8.1%, according to a Reuters poll.

Excluding the volatile food and energy components, core CPI increased to 6.3% from 5.9% in July, putting further pressure on the Fed to continue on its rate-hike spree.

"Bottom line, it only fortifies the Fed's hand for a tougher inflation fight," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

"The chance of the Fed moving back to less aggressive rate hikes over the next quarter is off the table".

Policymakers last week emphasized their determination to keep raising rates until there is a sustained drop in inflation, which has been running at 40-year highs and above the Fed's target of 2%.

Money markets now see a 85% chance of a 75-basis-point increase in rates and 15% chance of a whopping 100 bps hike by the Fed at its Sept. 20-21 meeting, while expecting rates to peak around 4.21% in March 2023.

The dollar, which has risen sharply this year in part due to expectations of aggressive rate hikes by the Fed, erased losses to turn positive.

The Stoxx Europe 600 index reversed an advance, with real estate and retail shares leading the decline. The rally in crude oil stalled as the dollar’s ascent offset global demand concerns. Bitcoin fell below $22,000.