ASX 200 breaches 7,000 points for the first time since May 2021, but why?

The market is seeing red after inflation beats expectations…

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published January 25, 2022 2:22 pm AEDT

Graph showing a fall in share price. — Image source: Getty Images

Key points

The ASX 200 Index is at its lowest point in eight months
Data from the Australian Bureau of Statistics shows inflation has increased 3.5% since last year
Investors are putting selling pressure on ASX shares amid the news

The S&P/ASX 200 Index (ASX: XJO) is hurtling towards correction territory on Tuesday. In the process, the benchmark index has now fallen below 7,000 points for the first time since May 2021.

At the time of writing, the Aussie index that tracks the top 200 listed companies on the ASX is down 2.54% to 6,958.5 points.

Interestingly, the ferocious sell-off is out of step with the movements on US markets overnight. So, what could be weighing down investor sentiment today?

Let's take a closer look.

Aussie inflation runs hotter than expected

A potential catalyst behind the steep drop in ASX shares on Tuesday could be the release of current inflation figures. The byproduct is a heightened expectation that the Reserve Bank of Australia (RBA) will increase interest rates sooner, rather than later.

According to the Australian Bureau of Statistics, the consumer price index (CPI) increased 1.3% in the December ending quarter. This rise in household inflation brings the increase in CPI compared to 12-months ago to 3.5%. Prior to release, investors had been expecting a 2.3% CPI print.

Already, bond markets are reacting to the news, outlining the expectation that the RBA will lift rates by May this year. In addition, bond futures indicate the potential of four interest rate rises throughout 2022. If this eventuates, the official cash rate would be sitting at 1.15% by December.

The increased likelihood of higher rates appears to have spooked the ASX 200 today. Not a single sector has been able to escape the treacherous selling pressure.

Here's a quick summary of what the market looks like on a sector-by-sector basis as we head into the afternoon:

ASX sector	Price change
Consumer discretionary	-1.2%
Consumer staples	-1.14%
Energy	-4.29%
Financials	-3.05%
Healthcare	-1.39%
Industrials	-2.13%
Information technology	-2.94%
Materials	-2.28%
Real estate	-3.03%
Communication services	-2.51%
Utilities	-2.3%

Data as at 2 pm AEDT

The near 3% tumble in the benchmark index has now erased all of the gains since May 2021.

The few green soldiers of the ASX 200

As sentiment continues to go cold on ASX 200 shares, there are a few companies that have managed to dodge the red bombardment today.

These companies include A2 Milk Company Ltd (ASX: A2M), Star Entertainment Group Ltd (ASX: SGR), and Resmed CDI (ASX: RMD).

Finally, today's downward move marks the second biggest since 26 February 2021. The only session to outdo it occurred in the first week of this year.

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