Super-Hot Inflation Unsettles Markets And Oil Marches Back Up On Ukraine Fears

The only way is up for inflation, with the UK snapshot for March coming in at 7% and in the US the CPI reading hitting a 41 year high at 8.5%. The steepest rises in a generation have unsettled financial markets, as investors digest the unsavoury prospect of tougher hikes in interest rates.

By Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

‘’After another super-hot reading of prices, consumers and companies are bracing themselves for a fresh squeeze on their budgets, as there is little sign of the inflationary pressure cooker cooling off just yet. The S&P 500 and NASDAQ reversed earlier gains to end lower, and the FTSE 100 is expected to open pretty flat, as traders mull the prospects of big companies’ ability to withstand a knock in consumer confidence, alongside higher commodity prices.

The Reserve Bank of New Zealand was pulling no punches in its monetary policy moves, pushing up rates by 0.5%, instead of the 0.25% hike more widely expected. The same strategy is expected to be taken by the US Federal Reserve at its next meeting in May, to try and dampen down demand, with a succession of rate rises expected through to the end of the year. But given the worries about the prospect of stagflation setting on the UK economy, with growth in the economy slowly grinding to a halt, the Bank of England is expected to opt for a gentler incline of rate rises, but up they will go nevertheless.

There are glimmers of hope that we may be reaching the peak of a punishing ascent of prices. The core measure of inflation, stripping out more volatile food and energy costs, didn’t rise as much as expected in the US, with supply chain issues appearing to ease slightly. Beijing’s decision to allow a limited lifting of lockdowns should help mitigate problems but there are still warnings of bottlenecks, with three key suppliers to Apple forced to suspend operations at factories. There is as yet no end in sight for Tesla’s giga factory shutdown in Shanghai, which is set to significantly upset production for the second quarter. Despite the disruption caused by growing Covid cases in March, exports from China grew more than expected up 14.7% year on year, as demand soared with other countries emerging out from under the shadow of the pandemic, but the soaring cost of commodities also contributed to the increase.

Oil is on the march higher again as worries rebound about supply amid the relentless conflict in Ukraine, with Russian troops massing on Ukraine’s Eastern borders and Moscow refusing to re-start peace talks. President Biden’s accusation that Vladimir Putin is responsible for genocide in Ukraine has led to expectations that sanctions will be ratcheted up further. As firms snub Russian oil and logistic problems constrain exports from the region fresh global supply fears have been sparked with the latest data showing oil and gas condensate production from the country has dropped below 10 million barrels a day this week. Brent crude is trading around $104 dollars a barrel, adding to gains from the previous session. Although Brent crude has fallen back from the eye-watering $139 a barrel it hit in early March, prices are still up by 31% since the start of the year and the creep back upwards is leading to concerns that the short term respite from ultra-high prices at the pumps may be short-lived, and that costs will stay elevated for longer.’’