But why are these numbers wreaking so much havoc on global stock markets? And should Aussies be worried about it too?
Inflation is rising: 4 reasons why
The easiest way to understand inflation is that it’s the overall rise in the price of goods and services in the economy. Put another way, things cost more – and you get less bang for your buck.
While a moderate amount of inflation is healthy for the economy, inflation that is too high will actually slow down economic growth and push unemployment levels higher.
At the moment, a number of factors pushing inflation up have reignited investor concerns.
But as a consequence, Americans are actually getting more from their stimulus checks than they were from their jobs, said JP Morgan Asset Management global strategist Kerry Craig.
In other words, there are jobs – but no one wants them. “So companies will have to pay people more to get them to come to work.” This pushes pressure for wages to go up, which in turn pushes up inflation.
More broadly, economic growth across the US – as well as most of the globe – is picking back up. America’s GDP rose by an annualised rate of 4.6 per cent in the first three months of 2021, exceeding economists’ expectations.
This is helped along by the COVID-19 vaccine roll-out across the States. To date, nearly 156 million Americans – nearly 47 per cent – have had at least one dose of a vaccine, allowing businesses to reopen, employees to return to their jobs and people to get out and about.
The growth is a good thing – but it’s also a driver of inflation, too, since the better the economy is faring, the more demand there is and the more people are hired, all of which push up wages and the price of goods.
At the same time, the price of commodity prices – raw materials used in creating other things – are hitting very high notes. Demand from China is pushing up iron ore prices; ; and steel prices are triple their 20-year average.
Commodity prices are also being pushed up by investors looking for a hedge against the share market. “There could be a lot of speculative buying and trading pushing commodities higher but for now there does still seem to be a lot of momentum behind the trade and reasons to think fundamentals will continue to support," said .
Rising inflation can trigger rate hikes – which could trigger a selloff
In turn, high interest rates makes it more expensive to borrow money, meaning people are less likely to spend on big-ticket items. With less money sloshing around the economy, inflation goes down.
Most of the world’s central banks currently have interest rates at record-low rates, brought down during the COVID-triggered recession to encourage economic growth.
But the reality is we’ve been living in a low-interest rate world for a very long time. “An abrupt change in the interest-rate outlook would be painful,” The Economist . “On Wall Street higher rates would be a shock. In emerging markets they would be agonising.”
When interest rates are low, investors are encouraged to pour money into risky assets. So up until fairly recently, JP Morgan Asset Management’s Craig pointed out, growth stocks like tech stocks looked very attractive to Wall Street investors.
“Some parts of the market are very expensive,” he said. “The justification has been: interest rates are really low. So tech stocks look okay when interest rates are low. But when they start to rise, earnings start to be questionable, and become less appealing,” he told Yahoo Finance.
“They have a big weight in the US. So it’ll hit the US much more than in, say, Europe, which has more cyclical stocks,” said Craig.
The US Federal Reserve is well aware of these fears, and they’ve urged investors to be “patient” amid the “transitory” inflation rise.
“Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions.”
In short, the higher-than-expected rise in inflation won’t cause the US Federal Reserve to hike rates. But this hasn’t reassured investors.
“Inflation fears are persisting even though the Federal Reserve is saying, ‘well, this’ll pass and we’ll keep interest rates low’,” Craig said.
Higher interest rates also tend to make bonds more attractive, and is another reason why investors might look to sell off their stocks.
“For stock markets, the prospect of higher interest rates is a clear negative,” said independent economist Stephen Koukoulas.
“Not only will tighter monetary policy cause economies to slow down, in time, but will also see investors reconsider their asset allocation decisions towards higher yielding bonds and away from stocks.”
Bottom line: Should we be worried?
It’s certainly something to keep an eye on, says CommSec chief economist Craig James.
“It’s a case of being alert and not alarmed at present. Inflation was always expected to lift with the significant fiscal and monetary stimulus,” he told Yahoo Finance.
“Central banks believe that transitory or temporary factors are likely influencing inflation at present, and many more months of data will be assessed before central banks make judgement calls. If wage rates remain tame then this will reduce fears about any longer-lasting higher rates of inflation.”
Meanwhile, AMP Capital chief economist Shane Oliver says inflation will likely push higher before easing.
“While the risks have increased we remain of the view that the near term inflation spike will prove temporary,” he said.
“The likely fall back in inflation later this year combined with central banks remaining dovish will mean that any near-term inflation bond market panic and hit to share markets are likely to be short lived.”
Australia’s Reserve Bank governor Philip Lowe has repeatedly signalled it won’t be lifting interest rates unless three things happen: inflation is in their target range, more Aussies are in jobs, and pay rises.
“For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.”