Danni Hewson, AJ Bell financial analyst, comments on US inflation data:
“Markets expected a big number, they were prepared, but US inflation has thrown something of a curve ball today. 5% exceeds expectations and the heat will no doubt spark a few uncomfortable conversations. The Fed’s consistently said it is prepared to let things run hot but how hot is too hot? Prices were expected to rise, particularly when you consider the massive drop in the price of oil last year but when you strip out the volatility of energy and food prices it’s clear there’s a myriad of issues at play. Bottleneck’s in supply chains, pent up demand, lockdown savings - all these things have created an unfamiliar landscape.
“Most of those factors will be transitory but others will last for longer. Some businesses are struggling to recruit staff, particularly in sectors like hospitality and retail. Where there are labour shortages wages will rise. Even small businesses are saying price rises are probably on the cards in the coming months. I’ve heard it said many times that best way to combat high prices is high prices, at some point consumers just say no. The problem at the moment is consumers haven’t been given a chance to say yes to very much at all over the last year and they’re ready to spend.
“Investors have been bullish so far but today will fire a bit of a warning shot and US markets took an immediate hit, albeit a pretty small one. Perhaps because these year on year comparisons are tricky after the year that was and there is plenty to suggest that the US economy is just getting its mojo back, picking the pace back up to where it should have been if the pandemic hadn’t knocked it back so dramatically. But the speed of recovery needs to be considered and a careful hand needs to stand ready to turn off those stimulus taps if the heat becomes too much to handle.”
