The impact of US inflation on share prices

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US inflation

A new presidency, vigorous government spending plans, and the coronavirus pandemic has meant that United States (US) economy has certainly had its ups and downs recently. In fact, in recent months, at the time of writing, the US inflation rate hit a 13-year high, meaning that consumer prices rose by 5.4% over the year to the end of June 2021 — the largest increase since August 2008. 

For those investing in the stock market, the US inflation rate is certainly on the radar, as it can have an effect on the economy, the stock market, as well as commodities, such as oil and gold. With meetings in the pipeline from the US Federal Reserve Board of Governors, there is much speculation over the rate of inflation and the actions take on interest rates, resulting in movement in the stock market. 

The US Central Bank

According to Plus500 stock trading blog, the US Central Bank stated that no interest rate hikes were planned prior to 2024, however the US Federal Reserve Board of Governors pushed forward the possible timeline for discussing interest rate changes and for tapering its bond-purchase program to 2023.

With the recovery from the pandemic in mind, this move may seem aggressive. However, there has been diverse opinions from the Federal Reserve on the time frame for any rate increases, likely dependant on the level of economic recovery the US experiences as time goes on. 

If the Federal Reserve does react to the inflation rates by making borrowing money more expensive, in order to counteract rising prices, this will possibly have a knock-on effect on the economic recovery of other nations around the world. 

The European markets and the UK’s FTSE 100 Index also saw a decline in value in reaction to the predicted actions of the Central Bank and the impact of US inflation rates. 

US Stocks 

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With the market sentiment quite fearful of how the Central Bank would have to act to contain inflation, the US stocks did witness a rise in global sell-offs, sparking a fall on Wall Street and further declines in Asian markets. There was caution among investors, as it’s believed that the interest rates will rise more quickly than previously expected. 

The S&P 500 (USA 500), Dow Jones Industrial Average (USA 30 – Wall Street) and Nasdaq (US-TECH 100) all experienced a downward trend as a result of the Federal Reserve’s announcement about their possible timeline for discussing interest rates.  

However, some experts believe that the inflationary pressures will be temporary, and that other factors have taken their toll on the US economy — such as supply chain issues, manufacturing difficulties and shortages of particular products. Once these issues resolve as things get back to normal after the pandemic, it’s believed this inflation rate will decline. 

Other sectors saw prices initially fall following the announcement, such as the value of Crude Oil (CL) and Brent Oil (EB). Investors therefore may be prepping for their value in other markets to lessen, where they would have normally used them as possible hedges against inflation impacts. 

The Federal Reserve Open Market Committee (FOMC) is also set to have their two-day policy meeting at the end of July this year, which investors will have as a poignant date in their economic calendar. The results of this meeting could reveal insights into the Central Bank’s monetary policies, and so traders would be open and closing their positions on the market accordingly. 

Stock futures in the technology sector also saw a fall in prices, with the futures on the Dow declining nearly 150 points, and the S&P 500 and Nasdaq 100 futures also trading negatively. Although experienced due to the US inflation rates, this also coincided with the quarterly earnings reports from several of the major technology companies in the United States. 

 

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