US inflation ‘red flag’ dents investor confidence

Global stock markets are in retreat following higher than expected price inflation figures in the US.

The latest official figures show that US inflation rose at its fastest pace in nearly 13 years.

Rising inflation prompts fears that the US Federal Reserve, its central banks, will be forced to tighten monetary policy and hike interest rates.

Higher interest rates could slow consumer spending and change the valuation model for company shares based on future discounting.

US consumer prices rose by 4.2% in the year to April, as the economy started to reopen.

A month earlier, the inflation figure was just 2.6%.

One likely factor behind the rising price inflation is bottlenecks in the supply chain, as consumer and business activity resumes.

Kevin Brown, Savings Specialist at Scottish Friendly, said:

“An increase of 4.2% is the red flag that we are now entering into a period where US consumer prices begin to rise sharply.

“This is the inevitable consequence of increasing the ready money supply, or ‘printing money’ if you like. We’ve heard many people say “it’s different this time”, but that’s usually a warning signal it’s really not different at all and the laws of economic gravity remain intact. Given today’s movement it’s a warning signal we should heed.

“Stock markets fell even before today’s announcement because of fears over inflationary pressures and these latest figures will do little to alleviate investors’ concerns.

“The US figures also provide a small window into the future for the UK where we expect prices will follow a similar trajectory over the coming months, as more restrictions are eased and consumers are given the opportunity to spend freely once again.

“The risk for households is that a sustained period of higher inflation could be damaging to many savers who will find it almost impossible to find a home for their cash that offers a rate of interest greater than that.”

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