Professional Services | Financial
Inflation expectations: Cause for concern or economic recovery? Following on from a significantly challenging 2020, much of the positive momentum created in the final quarter as a result of Covid-19 vaccination optimism carried over into the beginning of 2021. However, despite a strong economic recovery including lower unemployment rates and higher retail sales, inflation expectations are now causing market rallies to stutter somewhat. The battle against inflation To avoid disrupting the economic recovery experienced following the easing of national lockdowns across the globe, central banks such as the US Federal Reserve, Bank of England and European Central Bank have all reiterated their plans to continue quantitative easing for the time being while keeping interest rates low. This is in their bid to continue seeing more money flow back into the economy and further stimulate growth which has been lost due to the recent lockdowns. Now we are seeing a slight return to ‘normality’ and economic activity is beginning to improve, there has been a significant uptick in demand for certain products for which suppliers have had to increase their manufacturing in a short period of time. However, suppliers have been caught on the backfoot as a result of the speed of recovery and are therefore struggling to keep up with the accelerated demand and this is resulting in supply chain shortages. Higher inflation has also been driven by ‘base effects’, particularly in energy costs because we are comparing annual rates against April 2020 when oil prices had fallen dramatically. Having explained why inflation is becoming a widely discussed topic, it is now worth moving onto how this impacts investors. Equity markets have been climbing fairly consistently since
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the Covid vaccination announcement at the end of 2020 but in recent weeks have become more volatile because inflation concerns could cause central banks to halt quantitative easing and raise interest rates sooner than suggested. Inflation concerns become even more pertinent when the price of goods are
not just rising but are accelerating, like what we are seeing within commodities market, such as oil and copper, as well as typical household goods and microchips. In the US, the CPI jumped 0.8% in April, beating expectations of just 0.2%. This contributed to the annual figure climbing 4.2%, the fastest pace in twelve years. The year-on-year figures are likely to appear high for several months to come as most parts
