Spike in US inflation rattles global markets

Dubai: Asian shares fell on Wednesday after data showing the biggest jump in US inflation in 13 years fuelled some market expectations that the Federal Reserve could exit pandemic-era stimulus earlier than previously thought.

Asian markets were mostly lower on Wednesday, tracking a decline on Wall Street as investors weighed the latest quarterly earnings reports from big US companies and data pointing to rising inflation.

The S&P 500 index fell 0.4 per cent, with most of the companies in the benchmark index losing ground. Banks, industrial stocks and companies that rely on consumer spending accounted for a big share of the decline.

The Dow Jones Industrial Average dropped 107.39 points, or 0.3 per cent, to 34,888.79. The tech-heavy Nasdaq slid 55.59 points, or 0.4 per cent, to 14,677.65, while the Russell 2000 index of smaller companies lost 42.96 points, or 1.9 per cent, to 2,238.86.

"This backdrop of higher for longer US inflation and a faster hiking Fed and strengthening USD is not a good recipe for emerging Asia,'' said Robert Carnell, regional head of research Asia-Pacific at ING, referring to the U.S. currency.

The US consumer price index jumped 0.9 per cent in June, the Labor Department said on Tuesday. That was above market expectations and the largest gain since June 2008.

"Against the background of higher, longer U.S. inflation, a taper coming earlier seems to be the likely direction of travel as far as policy goes," said Rob Carnell, ING's Asia-Pacfic head of research.

Is the price surge sticky?

Prices rose 5.4 per cent in June compared to a year ago, marking the largest spike since 2008 as the pandemic-battered economy regains its footing and questions build over how long this steady climb in inflation will last.

Inflation has been on a steep rise for about four months as the recovery gains steam, President Joe Biden's $1.9 trillion stimulus package revs up the economy and consumer demand rebounds much faster than supply chains can catch up.

Policymakers at the Federal Reserve and the White House have consistently said the price pops aren't here to stay, and that it will take patience for the economy to come back to full strength and for prices to simmer down.

"We expected a pop in inflation like this," San Francisco Fed President Mary Daly said of the inflation data on CNBC on Tuesday. "Right now it really remain steady in the boat. Don't read too much signal out of any month of data. And let's get through this volatile period so we can really see where the economy is."

Fed benhind the curve?

Republicans and some prominent economists say the Fed is already behind the curve when it comes to tamping down inflation.

One big challenge for the policymakers is Americans' perceptions of inflation, which can influence consumer spending choices. If Americans expect the cost of goods and services will keep rising, they may be more likely to buy more furniture or plane tickets now, before the price tag stings even worse. That cycle of behavior only pushes prices higher, making those very inflation expectations self-fulfilling.

If inflation continues to mount through the rest of 2021 and beyond, policymakers may find it harder to convince Americans that higher prices will be short-lived.

Federal Reserve Board Chair Jerome H. Powell is expected to face questions about the rise in inflation, how long it will last, and the Fed's response, when he testifies on Capitol Hill on Wednesday and Thursday. Powell has repeatedly said that a clearer picture on inflation will come with more time and more data. In the meantime, he pledges that the central bank is keeping a close watch.

The Fed's main policy tools revolves around interest rates. The Fed slashed rates to near zero at the beginning of the pandemic, and central bankers say they won't consider raising rates until there's been substantial progress in the labor market, which is still down 6.8 million jobs from February 2020.

-- With agencies