Talking Point  

Why inflation doesn’t have to be bad for US equities

Why inflation doesn’t have to be bad for US equities

Higher inflation has come to the US, but this doesn’t have to be bad for the equities of that country, according to Chris Darbyshire, chief investment officer at wealth management firm Walker Cripps.

The most recent US inflation print showed a rise to 5.1 per cent, which is considerably above the 2 per cent target of the Federal Reserve, that country’s central bank. 

Higher inflation is often associated with poorer performance from equity markets as some companies profits suffer, while central banks typical response to inflation running above target is to put interest rates up, which would be expected to put interest rates up, while also increasing the returns available from cash in the bank, and from bonds.

But Darbyshire believes this time could be different as the central bank appears to have taken the view that the present much higher inflation rate is temporary. 

He said: “The US central bank is firmly in the dovish-camp - its latest forecast showed inflation returning to 2.2% by Q4 this year while the private sector is expecting a full percentage point higher. However, while central banks regard inflation as temporary, they will continue to pump money into markets through extraordinary amounts of asset purchases. Only last week the balance sheet of the US Fed passed $8 trillion for the first time, double its size of a year ago and now about a third of the size of the entire US economy. With close to $300 billion being pumped into markets by central banks every month, the attitude among investors seems to be: ‘hold your nose and buy!"

david.thorpe@ft.com