A risk of rapid price hikes has worried investors and many are now taking money off the table.
The shadow of inflation loomed large over stock markets today amid fears that higher interest rates, to stop economies overheating, may be needed sooner than expected.
The FTSE 100 index fell over 170 points, or 2.4%, to erase all the gains seen over the previous week. The recent rally had been driven by prices of key resources, including iron ore and copper, surging to record highs on the back of China's domestic recovery and the re-opening of the global economy.
London’s top-flight index finished on Friday at 7,130, but the performance of Wall Street yesterday signalled that investors could no longer overlook the inflationary impact of rising prices and US president Joe Biden's massive stimulus programme in particular.
The tech-laden Nasdaq slumped more than 2% as the lofty valuations of growth stocks such as Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) became harder to justify in an inflationary and rising interest rate world.
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The US Federal Reserve has so far been relaxed about inflation, particularly as Friday's weaker-than-expected jobs report highlighted how far it has to go towards meeting its primary objective of rebuilding employment in the wake of the pandemic.
But the likes of Warren Buffett are increasingly worried that inflation is getting out of hand, with the billionaire investor telling Berkshire Hathaway (NYSE:BRK.B) shareholders last week that the US economy is “red-hot” after price rises across his conglomerate.
Buffett has been surprised by the extent of the inflation surge and warned share valuations may be impacted if US interest rates have to rise as a result.
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The outlook for monetary policy in the US may become a little clearer on Wednesday with the publication of US consumer prices. Figures from China today added to the jitters, however, after factory gate prices accelerated faster than expected to leave the consumer prices index at 0.9% in April, compared with 0.4% in March.
For now, investors in London are taking no chances after the FTSE 100’s slump returned the index below the 7,000 threshold. At the time of writing, Mexican silver miner Fresnillo (LSE:FRES), Sainsbury’s (LSE:SBRY) and BT Group (LSE:BT.A) are the only blue-chip stocks in positive territory as Tesla-backer Scottish Mortgage Investment Trust (LSE:SMT) slid 4% and “re-opening” stocks including Rolls-Royce (LSE:RR.) fell as much as 5%.
Rio Tinto (LSE:RIO) shares, which have ridden the commodities boom to reach record levels in recent days, were down 3% or 171p at 6,487p today.
Other big losers today include Renishaw (LSE:RSW), down 7%, airline International Consolidated Airlines Group (LSE:IAG) down almost 6%, Burberry (LSE:BRBY) down nearly 5% and Next (LSE:NXT) down over 4%.
UK firms issue own inflation warning
Household cleaning products firm McBride (LSE:MCB) last week gave one of the starkest inflation warnings yet from a London-listed firm, when it reported “rapid, significant and sustained” price rises for many raw materials.
It said June's anticipated rates of increase were more than double the levels it had forecast as recently as March. McBride has “moved swiftly” to protect margins but shares still tumbled 20% as the FTSE All-Share company warned that profits for the year to June will be 15% lower than the previous year.
Builders' merchant Travis Perkins (LSE:TPK) has also seen an “increasingly inflationary environment” after significant price rises on raw materials including timber, copper and steel. The group, which has almost 2,000 branches under brands including Keyline and Toolstation, said last month that prices were still “manageable”.
The hope for investors is that the burst of inflation triggered by the re-opening of global economies proves to be temporary. In the UK, the pandemic has been disinflationary after the CPI benchmark dropped from 1.7% in January 2020 to 0.7% this March.
Paul Dales, chief UK economist at Capital Economics, thinks that a widespread and sustained rise in inflation of the kind to worry Bank of England policymakers on the Monetary Policy Committee (MPC) won't happen for another couple of years.
He said: “It is only in 2023 that we think the effects of a strong economic recovery will have a wider and more sustained upward influence on inflation in sectors that were closed and sectors that stayed open. The MPC is unlikely to worry about inflation until then.”
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