US stock markets took a tumble on Wednesday as inflation jumped to an annual rate of 6.2% last month, higher than the 5.8% forecasted by economists.
This means US inflation stood at the highest annual rate since November 1990. Excluding food and energy, which tend to be volatile, inflation was 4.6%.
Dan Boardman-Weston, CIO at BRI Wealth Management, said: "Markets are understandably nervous about the implications of this and it’s fair to say that inflation is going to keep moving upwards over the coming months. We think the Fed is correct in their interpretation that this is transitory though.
"Base effects, global supply chain issues and pent-up demand are all fuelling the current surge but we see all of these factors as being transitory. The issue many have though is what the definition of transitory actually is and whether the Fed will perform a volte-face and end up tightening policy too much.
"The tapering of asset purchases may be accelerated but the Fed will be reluctant to aggressively respond to these inflationary pressures.”
Meanwhile, the US Labour Department revealed that initial claims for state unemployment benefits fell 4,000 to 267,000 for the week to 6 November — the lowest level since mid-March 2020 when the coronavirus pandemic first struck the economy.
Unemployment claims soared into the millions last year, but have moved steadily lower in 2021 as widespread vaccinations have allowed businesses to reopen.
In Europe, London's benchmark index outperformed against its continental peers as strong corporate updates helped outweigh continued concerns about inflation in the States, China and Germany.
Inflation in Germany picked up to 4.5% in October, rising from 4.1% in September, but slightly below August’s 4.6% rate, according to the country’s statistics office Destatis.
A surge in energy prices was behind the rise, up 18.6% year-on-year, and up for the fourth month in a row.
Prices of heating oil doubled and motor fuels jumped 35% while prices of natural gas and electricity rose by 7.4% and 2.5%, respectively. Food prices are also surging, up 4.4% over the period.
Michael Hewson of CMC Markets said: “The focus remains very much on company earnings, against a backdrop of rising prices, with apprehension rising that the inflation genie still has some way to go in terms of further upward pressure.”
Asian equities were mixed on Wednesday with the Nikkei (^N225) falling 0.6% in Japan and the Shanghai Composite (000001.SS) down 0.4% on the day. However, the Hang Seng (^HSI) managed to eke out a gain of 0.8% in Hong Kong.
It came as factory gate prices in China surged to a 26-year high last month. The producer price index jumped 13.5% in October — its fourth straight month of rises and the largest increase since 1995. It was well above expectations of 12.2%.
Meanwhile, consumer prices also rose more than expected as manufacturers passed on the higher costs.
“Ongoing and heightening inflation fears in the world’s two largest economies — and elsewhere in other major economies — are going to spook global financial markets as we move towards the end of the year,” Nigel Green, chief executive and founder of deVere, said.
“Whilst markets might not be balking right now, as they currently have a sort of tunnel vision, with central banks and governments around the world pulling back their unprecedented support programs due to price surges amongst other factors, the easy money tap is steadily going to dry up.”
Watch: What is inflation and why is it important?