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Concerns on inflation

13 May, 2021 | Return|

On Tuesday, stock markets got the jitters amid fears of rising inflation when the US announced its latest figures for the year to March. According to commentators, the market continues to be nervous of inflation which is clouding the apparent recovery from Covid 19. Surging commodity prices in recent days are a sign of this, and key drivers behind these concerns are the huge infrastructure and stimulus packages in the US. 

Inflation figures have now hit 2.6% in the 12-month period to March this year, which breaches the Federal Reserve's target of 2% and thereby raising fears it might increase rates to cool things down. However, Jerome Powell, the Fed chairman, has stressed repeatedly that he is not thinking of raising interest rates as he believes the rise in inflation is only temporary. 

There are similar concerns in other economies, but central banks have so far played down the risks. What we have to remember is that inflation was always likely to pick-up over the next few months given that in the same period a year ago economies were closed and oil prices slumped, and so the figures are from a very low base. 

If inflation persists and we are still talking about this in the months to come, then that is a different scenario and will potentially lead to higher interest rates. However, runaway inflation does not look likely and projected growth and inflation rates for many economies look much more subdued in 2022 and beyond. 

It does not look likely that central banks will change their current stance and raise interest rates any time soon, but the markets and investors are likely to remain wary that inflationary pressures might prove to be persistent and lead the Fed to rethink. 

There are two very diverse views in the markets at the moment which are causing a lot of volatility or turbulence as investors try and decide which will win out – strong growth and inflation or weakening economies and unemployment post the ending of various government support schemes, including the furlough scheme here in the UK. As such, expect markets to swing violently around until we get more clarity on what outcome will prevail. 

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