January 13, 2022

Inflation in US continues to hike

 The main US equity indices showed modest growth in the past two days. At the same time, a correction in the equity market started at the beginning of the new year. This corrective move of some indices has already become more significant than the previous ones. Many experts expect the stock market to collapse this year due to monetary policy tightening by the US Federal Reserve. The US regulator will not be the only central bank to tighten policy. Although the European Central Bank is not ready for tightening, the pandemic emergency purchase programme (PEPP) is expected to end this year. The Bank of England has already raised the benchmark rate, and other regulators are likely to follow suit. Generally speaking, 2022 will be the year of tightening. Meanwhile, stock markets will feel pressure due to this fact.

The US inflation report came out yesterday, showing an acceleration of 7.0% on a yearly basis. Thus, measures taken by the Federal Reserve have not had any effect on the consumer price index so far. Above all else, the inflation hike may continue in the coming months due to the latest coronavirus wave driven by the infectious Omicron variant. It will affect markets in any case, as well as supply chains, the labor market, and so on. Although the Omicron strain has mild symptoms compared to other variants, it is also reportedly more contagious than its predecessors. In this light, pressure on health care is now mounting in many countries, including the United States where thousands of flights were canceled as many pilots had to self-isolate due to Omicron. This means that Powell's hopes that inflation would slow down amid the recovery of supply chains could fail. In addition, the Federal Reserve continues to pump cash into the American economy under the quantitative easing (QE) program. The size of monthly asset purchases now totals $75 billion. The regulator may abandon the QE program already in March. Nevertheless, it will keep injecting cash into the economy until that time, meaning that the money supply will continue to grow. As a result, consumer demand in the US will remain high, but supply will not be able to meet demand. Consequently, inflation is likely to rise to 8.0% in January-February. This will be neither beneficial nor harmful to the US equity market because it is clear that monetary policy tightening will take place in 2020 in any case. This is what investors fear.