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Stocks have tumbled as prices look set to run higher in 2021
Thursday 20 May 2021 Author: Yoosof Farah

Inflation concerns have dominated stock markets and UK figures on 19 May show, as economists have feared, it’s making a comeback.

Consumer inflation in the UK rose from 0.7% in March to 1.5% in April ahead of the 1.4% forecast. Although this has been mainly down to one-off influences like rising energy and clothing prices, expectations are that inflation will continue to run higher.

While the figure itself isn’t of concern at the moment and is lower than the Bank of England’s 2% target, it’s the speed of jump which suggests inflation could reach that target in just a couple of months, and has investors concerned with the FTSE 100 tumbling 1% shortly after April’s inflation numbers were revealed.

What stock markets are most concerned about is that we could be entering a period of abnormally strong demand which, as excess supply is used up, will naturally lead to higher inflation and with it, erode consumers’ purchasing power and reduce expectations of corporate earnings growth.

Concerns about rising prices have led to a number of stock market sell-offs in recent weeks as investors position themselves for when central banks, including the US Federal Reserve and Bank of England, start tapering off support for the economy through quantitative easing and near-zero interest rates.

A survey of fund managers by Bank of America showed that inflation is seen as the biggest risk in markets with expectations remaining elevated, as 82% of respondents polled in April believe inflation is set to rise over the coming 12 months, not much below the record 94% reached in March.

Stocks fell earlier in May, and at the same time safe-haven asset and well-known inflation hedge gold reached its highest level since early February, after data showed US consumer price inflation rose 4.2% year-on-year in April, its highest level of growth since 2008.

It remains unclear if April’s figures are the result of one-off industry shutdowns, and there are doubts among some in the finance world whether inflation is here to stay or not. But commodity markets can be good signals of consumer inflation down the road and with the surge in prices they’ve been flashing warning signals for months.

This is because as commodity prices rise, they seep into factory gate (or producer) prices as companies see their input costs rise, and then the same businesses increase their prices to preserve profit margins and that’s when consumers start to feel the effect.

Copper and iron ore – two metals seen as bellwethers for the global economy because of their wide range of uses – reached all-time highs earlier in May as the reopening of economies led to markedly higher demand, particularly from China, with supply failing to keep up.

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