99 Problems… But Inflation Ain’t One

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What's going on?

US inflation data out on Thursday showed prices rose 2.3% last month compared to last year, lower than expected – but the news did little to stop the prices of stocks around the world continuing to fall.

What does this mean?

Inflation – which measures how quickly the price of stuff in an economy increases – was slower than analysts had expected thanks to falling energy prices and weaker growth in consumer rents.

When inflation is high, central banks generally increase interest rates to stop the economy overheating. As 2.3% is still higher than many would like, the US Federal Reserve is likely to continue its recent policy of raising interest rates in December and through 2019. And for investors, those higher interest rates mean that new government bonds offer a better return (or yield).

Why should I care?

For markets: The market sell-off has slowed somewhat.

Government bonds are pretty much “risk free”, because governments can always print money to pay them back (if they’re really struggling). So when yields rise, the less predictable returns from stocks tend to look less attractive. It’s usually “growth” stocks like tech (or those making no profit) that get hit the worst, as these are the ones where investors are gambling the most. US inflation data coming in a touch below expectations boosted investor optimism for future stock prices slightly. That could mean the stock market rout slows down (tweet this).

The bigger picture: Stocks have been dropping like they’re hot.

Stock prices fell around the world on Thursday. Markets in China hit their lowest level since 2014, while European shares touched their lowest in 21 months. One knock-on effect has been to put off companies considering selling new shares on those markets… but more on that below.

Originally posted as part of the Finimize daily email.

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