Features

Get set for an inflation scare

Investors are getting complacent about inflation. They should prepare themselves for a fright.

945_MW_P04_Markets

The US labour market is tightening quickly

Strong US GDP figures carried a "sting in the tail", says The Economist. The world's largest economy shrugged off a government shutdown to expand at an annualised pace of 3.2% in the first quarter, comfortably outstripping consensus forecasts. Yet "quiescent" inflation running at an annual rate of 1.9% in March suggests that underlying demand could be weak, so the Federal Reserve is unlikely to resume hiking rates for now.

The most likely path for US interest rates is now downwards, reckons Komal Sri-Kumar on Bloomberg. Central bankers are happy to take a dovish stance because previous predictions that ultra-low rates and quantitative easing (QE) would trigger surging inflation did not materialise. Between 2008 and 2015 the Fed's balance sheet of assets bought with printed money "more than quintupled", but inflation remained stubbornly below the 2% target. Other developed markets, including the UK and the eurozone, have had similar experiences.

Why hasn't it appeared yet?

This is especially the case since a crucial driver of inflation is now emerging, says Laurence Fletcher in the Financial Times: rising wages. Pay has been climbing for five years amid a tight labour market. It recently reached a ten-year high. This is a danger to the US-led global stockmarket rally on two counts. Higher costs mean lower corporate profit margins and earnings, which will undermine historically overvalued equities. The broader problem, however, is that investors are looking the other way.

An underrated risk

Any inflationary scare could prompt the US Federal Reserve, which has been counting on low inflation too, to raise interest rates fast to prevent price rises soaring out of control. That would remove a "key support" for global markets, as Fletcher says. It would also be very good news for gold.

Recommended

The inflation narrative has got overheated for now – but it’s inevitable
Inflation

The inflation narrative has got overheated for now – but it’s inevitable

With official CPI at just 0.4% in the UK, inflation seems to be everywhere you look except in government statistics. But it’s only a matter of time be…
24 Mar 2021
Here’s why inflation will take off after the pandemic
Inflation

Here’s why inflation will take off after the pandemic

There are lots of reasons to believe that we will see lasting post-pandemic inflation – increased demand and squeezed supply chains, for example. But …
22 Mar 2021
Short-term inflation is almost certain. But what could make it a long-term problem?
US Economy

Short-term inflation is almost certain. But what could make it a long-term problem?

Inflation will be welcomed when it arrives – but in time, it could grow to become a problem. John Stepek explains why, and what that will mean for inv…
11 Mar 2021
The inflation scare is far from over, warns the Bank of England
UK Economy

The inflation scare is far from over, warns the Bank of England

The Bank of England's chief economist has warned that UK consumer price inflation will soon spike as the economy reopens, calling it a “tiger” that co…
5 Mar 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021