Full circle

Why’s everyone talking about inflation?

Inflation in the US has dropped below 3% which means it has returned to being in the Fed’s (the US central bank) target range. UK inflation was 2.2% and is also close to the Bank of England’s 2% target. This is all good in the sense that inflation sky-rocketed in 2022 (to between 9% and 11% in the US and UK) and now appears under control. Inflation has gone full circle.

So what? The equity investor doesn’t like really high inflation because it usually means the economy is in turmoil, consumers stop spending, and growth is lower. That’s all bad for share prices. Look at 2022, the year of very high inflation, global equities fell around 18% (in $ terms).

But investors do like a bit of inflation because equities are seen as a hedge against inflation. Small rises in inflation should allow companies to raise prices and thus revenues. If costs are kept under control this means higher profits and that’s good for share prices.

In any event, equity markets look like they are taking these latest releases as a reason to stop worrying about inflation…for now. ?

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Alan Porter

16 August 2024