Inflation threat sparks global stock market sell-off

Europe
City of London

City of London

A global stock market rout sparked by fears of higher inflation that started on Wall Street spread to the FTSE 100 as investors braced for US price pressures to hit a 10-year high.

London’s blue-chip index tumbled below 7,000 points in its biggest fall in more than two months after a tech-led shares slump ahead of Wednesday’s inflation figures for the world’s largest economy.

US inflation is expected to have jumped from 2.6pc to 3.6pc in April as global shortages send commodity prices soaring and demand is stoked by stimulus and reopenings.

The expected pick-up would push US inflation to its highest point since 2011, prompting more questions over whether the Federal Reserve will intervene to stop the economy overheating.

The FTSE 100 closed 175.6 points lower at 6,947.9, a one-week low, as inflation worries spread from Wall Street to Asia and Europe.

IAG, the owner of British Airways, took the wooden spoon with a 7.4pc decline to 194.3p, while the London Stock Exchange Group was the sole riser, closing just 4p higher.

After being dragged off record highs on Monday, frothy share prices in New York fell heavily again on Tuesday.

The S&P 500 slipped a further 1.3pc at the opening bell while the tech-heavy Nasdaq index lost 2.2pc before regaining some ground.

As inflationary pressures build on a number of fronts, expectations for prices in the US, UK and Europe have climbed to multi-year highs in recent months.

Central banks including the Fed and the Bank of England have insisted they will look past a temporary surge in prices but investors are increasingly betting on rate-setters intervening early to cool the economy.

“You want a Goldilocks scenario – decent growth and not too hot inflation,” said Stewart Cook, co-head of European markets at Berenberg.

“If either gets a bit too strong, the concern is the Fed has to stamp down on that. Investors and the market are trying to gauge when central banks will withdraw the massive liquidity that has powered share prices and allowed the economy and companies to rebound as quickly as they have.”

Inflation has now leapfrogged coronavirus as the top risk facing markets, according to surveys tracking investor sentiment.

Central banks have argued that interest rate rises to curb inflation will only be needed if price increases became sustained rather than fleeting. However, markets have started to bring forward expectations of a US rate rise while the Bank has started to dial back its bond-buying stimulus.

Building inflation worries came amid more signs of rising gas prices in the US and labour shortages hurting jobs growth in the American economy.

Gas prices across the Atlantic have leapt after a cyber attack caused the shutdown of the Colonial Pipeline, a crucial fuel source in the east of the US. Meanwhile, the JOLTS survey pointed to record US vacancies in March while NFIB’s jobs hard to fill index also climbed to unprecedented highs.

Michael Pearce, economist at Capital Economics, said the surveys added to evidence that “labour shortages are widespread, pushing up prices and potentially acting as a brake on the recovery”.

“The economy could end up being mired in stagflation with the two parts of the Fed’s mandate in conflict,” he said. “High and rising inflation would justify rate hikes, but a persistent shortfall in employment would argue in favour of patience.”