The US is still in the grip of a dangerous rise in inflation as figures show that prices have risen by 7.5% from 2021. This marks the highest levels of inflation in the US for 40 years and it is sure to usher in a series of interest rate hikes in a bid to contain the overheating economy.
Stock markets were shaken following the inflation report. The faster-than-expected rise in inflation sent the Dow Jones Industrial Average plunging 500 points, while the NASDAQ fell 2.1% and the S&P 500 slipped 1.8%.
The consumer price index report indicated that it was the largest gain in inflation since 1982, and it was enough to cause yields to spike 2%. While the consumer price index survey showed a dramatic rise of 0.6%, it was still less than the 0.9% experienced last October. This has led to hopes that the inflationary rises are actually decreasing on a month-by-month basis.
The areas suffering most from inflation were electricity, groceries and shelter. Even the price of used cars in the US has shot up 40.5% higher compared to this time last year.
What is the cause of the skyrocketing inflation?
The base cause of the inflation rates is the fact that there continue to be supply issues caused by the pandemic’s impact. With soaring demand as the economy gets back to normal, it has caused the cost of a wide variety of goods to dramatically rise.
This has meant that the Federal Reserve has little option but to raise interest rates. The first interest rise could be due to hit in March, and there have been indications that there could be many more interest rate hikes in 2022.
The specter of inflation is troubling for a US economy that is finally starting to get back on its feet after the ravages of the pandemic. With the economy growing by 5.5% in 2021 and encouraging figures in the job market, it looks like the US might be over the worst. But with consumers feeling the pinch of rising costs in everything from food, fuel and rent, it could still be a difficult few months ahead.
What this means for the markets
It has already been a tricky year for the markets, and the latest inflation figures don’t make for good reading. This is because they are almost certainly going to trigger the rise in interest rates that would make future earnings less attractive. It’s yet to be seen how many interest rate hikes there will be but there could be as many as seven interest rate rises in 2022.
As such, it will be tech stocks that will be hardest hit by a rise in interest rates. This was something seen yesterday when tech companies ranging from Microsoft to Shopify and Adobe all saw their share values slide. All of which means it could be a tricky year for those ‘big tech’ brands.