Shares of the United States fell again on Wednesday as investors’ concerns over inflation escalated after government data showed signs of rising prices in many commodities.
The S&P 500 fell 1.4 percent in afternoon trade, extending its weekly fall to 3.3 percent. The tech-heavy Nasdaq was down 1.9 percent, and is now down 4.4 percent so far this week. The Dow Jones Industrial Average gave up 405 points, or 1.2 percent.
Meanwhile, the Toronto Stock Exchange fell 55 percent by the afternoon.
An alarming inflation hit the US economy in April, with consumer prices rising 0.8 percent year-on-year, reaching its fastest pace since 2008.
The acceleration in prices, which has been evolving for several months, has raised concerns that it could weaken the economic recovery from the recession.
Inflation is an excellent economic concern
As the economy recovers from the recession caused by the epidemic, investors are worried that inflation may return to what it has been for years. However, Federal Reserve officials and other economists have said that moderate inflation could be a good thing to recover.
The Labor Department’s report on Wednesday pointed out that consumer prices for everything from food and clothing to new cars rose faster than last month’s 0.6 percent.
Over the past 12 months, prices have risen 4.2 percent – the fastest rise in profits from 4.9 percent in the 12 months ended September 2008. Excluding volatile food and energy, core inflation rose to 0.9 percent in April and 3 percent in the previous 12 months.
After years of stagnant inflation, concerns about rising prices are at the peak of economic concerns as the Federal Reserve struggles to raise it. Parts related to material shortages and supply barriers are a major factor.
Investors are increasingly trembling. On Tuesday, the Dow Jones Industrial Average fell 470 points, or 1.4 percent, to its worst day since February 26.
The sharp rise in inflation in April has pushed up prices of used cars and trucks by 10 per cent. Motor vehicle production has been hampered by a shortage of global semiconductors, which will increase demand for used vehicles.
Jeff Butchbinder, a stock strategist at LPL Financial, said that although the recent reading of inflation was warmer than expected, the market should not be surprised by the rise. The sentiment in practice is that rising inflation will be temporary, however “it remains to be seen whether these highs will be sustained very soon,” he said.
Inflation is high in Canada
In Canada, the most recent inflation figure was high, a year ago, when the epidemic was in its infancy, due to falling prices.
Statistics Canada Consumer price index rose 2.2 percent in April to March.
This is an increase over an epidemic period of 1.1 percent year-on-year in February.
The inflation rate is the largest factor that the Bank of Canada considers when determining its core interest rate. The bank wants to see an inflation rate of one to three per cent.
Because everything is equal, the bank lowers its rate to stimulate the economy when the inflation rate is very low, and raises its core lending rate to cool things when inflation is very high.