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Chart of the Week: Inflation, Rate Hike Fears Are Here to Stay

Billy Toh

June 10, 2022

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In the US, stocks plunged on Thursday as investors grew anxious over upcoming inflation data that’s set to be released on Friday before the market open.

The S&P 500 Index was down by 2.4% while Dow Jones Industrial Average shed 1.9%. The tech-heavy NASDAQ 100 Index was the worst hit with a decline of 2.7%.

Investors are bracing for the latest Consumer Price Index (CPI) numbers on Friday as they look for clues on how aggressively the US Federal Reserve (Fed) will ramp up interest rates to fight inflation.

Inflation is expected to persist in May with consensus projections looking at an 8.3% increase in May, which is on par with April’s reading of 8.3%.

Meanwhile, core inflation (which excludes food and energy prices) is expected to increase by 5.9%.

Policymakers alarmed by prospects of an inflationary cycle

The data above shows that global inflation is picking up momentum. Policymakers are alarmed by the prospect of an inflationary cycle as higher prices start to drive higher wages, which could lead to even higher prices.

Major central banks are racing to ditch post-pandemic stimulus and will raise interest rates to fight inflation.

On Tuesday, the Reserve Bank of Australia (RBA) became the latest to deliver a hawkish surprise to the market with a 50 basis point (bp) rate hike, following in the footsteps of the US, Canada and New Zealand.

The more cautious European Central Bank (ECB) has also ended its long-running stimulus scheme and signalled a shift towards monetary policy tightening with a series of rate hikes on the cards.

World Bank warns of 1970s-style stagflation

Meanwhile, the World Bank slashed its global growth forecast and warned that many countries could fall into a recession, bringing back memories of the 1970’s and its high inflation.

According to a Global Economic Prospects report, global growth is now expected to slip to 2.9% in 2022 from 5.7% in 2021.

The report added that growth is expected to hover around that level through 2023 and 2024 while inflation remains above target in most economies, pointing to stagflation risks.

The risk is real given the global inflation rate level that we’re in (see chart below).

Stay invested during the downturns

As inflationary pressure continues, central banks will try to curb inflation by raising interest rates.

The fears surrounding the liquidity shock to the stock market, as well as its implication to the economy, will continue to dampen the stock market recovery.

This could potentially lead to a bear market or a market downturn. However, it is important to remember that a bear market is temporary.

If you keep the focus on a long-term investment strategy and remain invested despite drops in the market, you’ll gain from the subsequent bull market.

Instead of fear-based selling, use the current market downturn as an opportunity to buy good companies at a discount.

Source: ProsperUs, CEIC

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.