Central Banks vs Inflation…who is your money on?

The word of the moment truly is inflation. It is almost impossible for one to escape headlines and articles about inflation, or to walk into the kitchen and not overhear complaints about the cost of living. Surely, we must be over it by now? Brace yourselves – its not over yet.

Monday 13th June saw another tough day for markets, as rumors of the Federal Reserve in the US raising interest rates by 0.75% to combat the tidal wave of inflation facing the American Public began circulating around wall street. In response, US Equities officially entered a bear market, with the Dow Jones Industrial Average tumbled below 30,000 points for the first time since January 2021. The rumors proved to be true, and the fed made its first 75-basis-point increase since 1994.

UK Interest Rate - 1.25%

US Interest Rate - 1.5%

China Interest Rate - 3.7%

Russia Interest Rate - 9.5%

Turkish Interest Rate - 14%

Argentina Interest Rate - 52%

Unfortunately, the impact of this rise will not be felt immediately, and US inflation has now hit a 40-year high, currently sitting at 8.6%. Such aggressive action will take hold at some point though – and that is what markets are waiting on.

Ultimately, markets will recover and resume a bullish trend, but such an event will only occur after the following:

· It is clear to investors that inflation has peaked in the US

· There is an end to interest rate rises

So, how long have we got to wait?

The answer to this question is so multi-faceted, you’d need more than just a crystal ball to find out the answer. Will Russia and Ukraine make peace? Will recent interest rate rises prove sufficient? Will the US and UK labor markets remain solid? Will consumers cut spending?

The Bank of England expects the UK's energy price cap to rise again in October, which will push UK inflation up to 10% this autumn. Despite this, it says that the "current high rates of inflation are not likely to last". It forecasts inflation will peak this winter - then come down to be close to 2% in about two years.

Once inflation is under control, when will the markets recover?

The average bear market lasts 9 months, but markets can take much longer than this to regain all of their losses. The last bear market was early 2020 – at the start of coronavirus pandemic – and was relatively short-lived, lasting only 33 days. The bear market that followed the 2008 financial crisis was a year and half, and the bear market during the 2000 dot-com bubble-burst went two and a half years.

Many analysts believe we could be looking at 3 to 4 years to recover from 2022’s crash, with economists split down the middle 50/50 on whether the US and Europe will face a recession.

To condense all of the above – inflation has not peaked yet, and markets can only begin to recover once the rampant levels on inflation are under control.