Cost Of Living Crisis Cements Bear Market

Markets continued to plunge last week as soaring inflation led to fears that the Fed would raise interest rates. Following a worse-than-expected CPI report, pundits now expect America’s central bank to increase the base rate faster and sooner.

In response to the news, the dollar strengthened significantly across major currencies, now buying over 135 yen for the first time in more than two decades. Worries about COVID-19 lockdowns in Beijing provoked another flight to safety, with investors seeking secure assets in the US.

Stock Market Response

South Korea’s Kospi and Japan’s Nikkei fell by more than 3 per cent following US CPI news, while the Hang Seng dropped by 2.8 per cent. Australian markets took a break for the Queen’s Jubilee celebrations, but are expected to finish lower as they re-open.

Investors are worried that the prospect of higher rates will make the bond market more attractive and cut profits at companies with large debts.

Worryingly high levels of inflation

Meanwhile, inflation continues to skyrocket.

Official data shows that inflation proceeded faster than expected in May, rising to an annual rate of 8.6 per cent, the highest level since 1981, reversing the easing trend seen in April.

Economists are now warning that the highest rates for 40 years might not be transient. Interest rates may have to rise too, potentially making it impossible for millions of homeowners around the world to pay their mortgages.

Markets in the US now believe that there is an 80 per cent chance that the Fed will raise rates by half a percentage point. The Central Bank will make its next policy statement on Wednesday.

In May, the Federal Reserve said that it was considering raising interest rates by the largest amount since 2000. Base rates may go up to more than 1 per cent in the coming months, potentially pushing the average mortgage rate up to 3 per cent.

At the same time, consumers are feeling the pinch. Real increases in the cost of goods and services are dampening spending power, potentially putting the economy into recession.

The rising price of oil is another major concern, with cost-push inflation potentially causing the Fed to reconsider its current tightening.