Business: Fresh inflation fears send global markets tumbling

• FTSE 100 recovers after seeing GBP 48BN wiped off amid fresh inflation fears
• Bank of England Chief Economist warns of 1970s-style price inflation in the UK
• Bank of England (BoE) Governor Andrew Bailey and policymaker Andy Haldane at odds over inflation risks
• Will an inflationary burst signal lift-off for gold?

Global markets have made a strong recovery since the massive sell-off seen early last year when the scale of damage caused by the coronavirus pandemic became evident.

Since March 2020, Wall Street has surged to new highs, and the FTSE 100 broke past the 7000-mark for the first time in over 14 months.

Stock markets are also edging higher ahead of the weekend, extending a late recovery in the previous session, courtesy of comments from central bank policymakers worldwide.

Inflationary pressures saw global stocks drop sharply in mid-week trade, with volatility driven by fears that increased consumer spending will push up the prices of goods and cause central banks to raise interest rates.

However, comments from the US Federal Reserve (Fed) appear to have calmed global stock markets as major indices have made substantial gains on Friday.

At the time of writing, the MSCI World Index – representing large and mid-cap equity performance across all 23 developed markets countries – has jumped up by 0.55% or 15.69 points to 2,892.48 after plunging by more than 4% at the start of the week.

Meanwhile, the STOXX Europe 600 Index has climbed 0.89% or 3.90 points higher to 441.22, and London’s blue-chip FTSE 100 Index is up by 0.94% or 65.63 points at 7,028.96.

Over in US markets, the Dow Jones Industrial Average has jumped 0.65% or 219.97 points higher to 34,241.42, and the tech-heavy Nasdaq Composite Index has gained 1.70% or 22.61 points.

Japan’s Nikkei has closed 2.32% or 636.46 points higher on Friday, while China’s SSE Composite Index at 3,490.38 has gained 1.77% or 60.84 points on the day.

In the cryptocurrency world, Bitcoin has recovered by 0.37% to trade at USD 50,663.72, while Ethereum is a staggering 5% higher at USD 4,063.05.

Fed Governor Christopher Waller reassured investors that policymakers would not raise interest rates unless inflation remained above the central bank’s 2% target for an extended period or became excessively high.

However, it seems too early to suggest that investors are entirely heartened given the recent volatility in global markets as inflation risks remain a real threat to finances and purchasing power.

Editor of This Is Money, Simon Lambert, said the question we should be asking is how quickly central banks will move to curb inflation pressure, especially when anecdotal inflation is hinting that an inflationary burst is looming.

His comments come in the wake of Wednesday’s stock market rout, which was triggered by US inflation data.

Inflation risks continue to rattle investors

The FTSE 100 plunged following the publication of US inflation data, which jumped 4.2% higher on an annualised basis and by 2.6% month-on-month, stoking interest rate hike fears.

It was the highest reading in the country in nearly two decades, as the last time consumer prices were that high in the US was back in 1996.

Michael Pearce, a senior economist at Capital Economist, said the surge in prices was driven by “reopening” activity with the cost of travel tickets, hotel rooms and car rentals all soaring by more than 16%.

Mr Pearce said the surge in prices might be a one-off as demand for consumer goods was bound to rocket following months of national coronavirus lockdowns.

However, the aggressive rise in prices has been far higher than forecasts made by analysts and experts. US inflation fears have rattled investors, and some now fear that the country is on “the verge of something a little more substantial than a one-off rebound.”

The mid-week sell-off added to the declines seen in global markets on Monday, partly driven by data from China showing a higher-than-expected increase in the Producer Price Index (PPI), with factory-gate prices rising by 6.8% year-on-year.

Investors are now worried that central banks, including the Federal Reserve and the Bank of England (BoE), will raise interest rates or tighten QE spending if prices continue to overheat.

UK inflation predictions are currently at their highest levels in thirteen years, and BoE policymakers appear to be at odds over whether drivers of inflation will persist as the economy recovers.

Easing concerns over US unemployment levels appear to have cooled global markets on Friday, with jobless claims at their lowest levels since the covid pandemic shocked the world.

However, other indicators signalling a rise in inflation could trigger further market volatility in global stock markets as this would encourage investors to shift towards less risky assets such as government bonds.

Investment Director of AJ Bell Russ Mould explained that Wednesday’s US inflation shock had left many investors believing that policymakers will need to tackle inflation sooner than expected.

Mr Mould added: “Investors were eager to see the global economy recover, but it now appears to be happening too quickly, and the actions required to pull in the reins on rising inflation aren’t favourable for stock markets.”

That said, calmer heads such as Fed Chair Jerome Powell and BoE Governor Andrew Bailey believe higher inflation will be temporary.

The Bank of England Governor sought to calm financial markets over inflation risks earlier this week, but his comments appear to contradict the outgoing chief economist, Andy Haldane.

Bank of England Governor and chief economist at odds over inflation

After BoE Chief Economist Andy Haldane warned of the need to prevent the “inflation genie” from escaping the bottle, Governor Andrew Bailey explained that drivers of inflation would not persist.

While low inflation levels should not be overlooked, rising inflation could force central banks to tighten stimulus programmes, which are currently helping to support pandemic-ravaged economies.

Speaking about the spike in US inflation, BoE Governor Andrey Bailey admitted that the Fed would need to monitor rising consumer prices closely. However, he said that on the “basis of what we’ve seen so far, we believe that inflation pressure will be temporary.”

However, his comments contradict statements from the outgoing chief economist, Andy Haldane, who told the Daily Mail that inflation would soar above its 2% target by 2021-end, fuelled by the UK’s robust recovery.

UK economy forecast to ascend to the top of the G7 growth table

According to Andy Haldane, UK economic recovery will be something akin to a “bouncing tennis ball”, outpacing the US and other G7 economies this year.

Mr Haldane has been optimistic about the UK’s recovery prospects for months now, arguing that easing COVID lockdown restrictions will unleash a wave of pent-up demand and fuel a mini consumer spending boom in Britain.

The BoE Chief Economist also expects UK recovery to be that significant that Britain could create as many jobs as it has lost this year, meaning there would be little or no rise in unemployment.

In an interview with the Daily Mail, Andy Haldane said that as the economy reopens and Britons get back to “normal spending and socialising habits, with money in their pockets, households and businesses will, I suspect, maintain the momentum in demand.”

However, he warned that the economy could overheat if the momentum is sustained into next year as firms have struggled to hire staff, and the spending boom will drive consumer prices higher.

Mr Haldane noted, “that with consumers ready to spend a significant percentage of their savings, this will put persistent upward pressure on prices, risking a more protracted – and damaging – period of above-target inflation.”

He went on to say that the Bank of England needs to take urgent action to prevent inflation from becoming a real issue.

At last week’s May policy meeting, Andy Haldane was the only policymaker favouring tightening monetary policy, with other members of the Monetary Policy Committee (MPC) stating that it was too early to cut the BoE’s bond-buying programme.

On Thursday, the outgoing chief economist said the BoE could prevent rising inflation by reining in plans to inject a further GBP 1TN of stimulus into the economy by 2021-end, which he analogised as “gently taking our foot off the accelerator.”

Mr Haldane said that failure to take timely action would cause significant disruption to jobs and finances. By tightening stimulus now, “we reduce the risk of a handbrake turn – for borrowing costs and the economy,” he explained.

However, that’s not to say that rising inflation is wholly negative as those with gold assets stand to benefit. An inflationary burst could signal a lift-off for gold by reducing the purchasing power of traditional currencies and, in turn, the amount investors could purchase gold for with any given amount of money.

Furthermore, as gold is in limited supply and can’t be devalued in the same way as fiat money, it tends to rise alongside inflation.