Can inflation woes spark a firestorm in global markets? - Kalkine Media

May 15, 2021 03:47 AM AEST | By Furquan Moharkan
Follow us on Google News:

The global equity markets are witnessing a sizeable correction. The reason? The credit may become costlier for the companies.

In the past seven days, two data sets on inflation came to light, and both presented a grim picture. The United States, the world’s largest economy, reported that its inflation rose 4.2% in April from the year ago period – a jump that is far higher than many analysts expected. The surge in retail prices in the US is the highest since 2008.

Also Read: Bears grip APAC markets on inflation woes

In the far east, the world’s second largest economy China has seen its producer price index rise by 6.8% in April – the highest pace in almost three and a half years.

This has set off concerns in the global markets. The central banks, the investors fear, would be considering a rate hike after this and doing away with the post-pandemic quantitative easing.

If the central banks would increase the policy rates, it would automatically make the credit costlier for the companies and individuals alike. The credit will become costlier quickly this time than the past incidences, as the central banks across the globe had made sure the policy transmission increases between 2018-20 – when the world was going through downward interest scenario in the face of prolonged slowdown.

This will not only make credit costlier for the companies, but also cause hindrances in the economic recovery after the 2020 recession, also referred to as COVID-19 recession.

And then with rate hike, as the US dollar becomes stronger, there is global imminent sell-off waiting in the wings. As soon as dollar becomes stronger, the returns on investments in other countries for Wall Street companies start diminishing. This triggers a sell-off, and further weakening of the local currency against the US dollar – thereby, setting off a vicious cycle.

In 2013, then Federal Reserve Chief Ben Bernanke spoke about doing away with the quantitative easing which was initiated in 2008. This led to equity market meltdown across the globe.

That was 2013. Almost eight years later, the global markets are more interconnected and dependent on each other. A unilateral rate action by Federal Reserve, for example, will have far-reaching consequences for countries like India. Indeed, central banks are in for tricky times ahead, with a tough task at hand – to strike a balance between economic recovery and inflation.

Also Read: US Fed sounds warning over rising asset prices

(The opinions expressed in this blog are those of the author and they do not reflect the opinions or views of the organisation.)


The content, including but not limited to any articles, news, quotes, information, data, text, reports, ratings, opinions, images, photos, graphics, graphs, charts, animations and video (Content) is a service of Kalkine Media Pty Ltd (Kalkine Media, we or us), ACN 629 651 672 and is available for personal and non-commercial use only. The principal purpose of the Content is to educate and inform. The Content does not contain or imply any recommendation or opinion intended to influence your financial decisions and must not be relied upon by you as such. Some of the Content on this website may be sponsored/non-sponsored, as applicable, but is NOT a solicitation or recommendation to buy, sell or hold the stocks of the company(s) or engage in any investment activity under discussion. Kalkine Media is neither licensed nor qualified to provide investment advice through this platform. Users should make their own enquiries about any investments and Kalkine Media strongly suggests the users to seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice), as necessary. Kalkine Media hereby disclaims any and all the liabilities to any user for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising from any use of the Content on this website, which is provided without warranties. The views expressed in the Content by the guests, if any, are their own and do not necessarily represent the views or opinions of Kalkine Media. Some of the images/music that may be used on this website are copyright to their respective owner(s). Kalkine Media does not claim ownership of any of the pictures displayed/music used on this website unless stated otherwise. The images/music that may be used on this website are taken from various sources on the internet, including paid subscriptions or are believed to be in public domain. We have used reasonable efforts to accredit the source wherever it was indicated as or found to be necessary.

Top ASX Listed Companies

We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK