Global update: Markets gripped by inflation fears

Although global equity markets generally ended May in positive territory, investor sentiment during the month was affected by growing concerns that mounting inflationary pressures could lead to higher interest rates.


  • US CPI rose at its fastest rate for over 12 years
  • The UK is set to post its strongest economic growth since WW2
  • Japan’s economy contracted by 5.1% in Q1

Although global equity markets generally ended May in positive territory, investor sentiment during the month was affected by growing concerns that mounting inflationary pressures could lead to higher interest rates.

“The shadow of Covid-19 is beginning to lift from Europe’s economy”

In the US, the rate of consumer price inflation increased from 2.6% to 4.2% year on year during April, rising at its most rapid rate since September 2008. Prices were stoked by a 10% increase in the cost of used cars and trucks, and further flattered by last year’s sharp Covid-induced decline. Investors’ concerns were compounded by a warning from US Treasury Secretary Janet Yellen that interest rates might have to rise “somewhat” in order to prevent the economy from overheating. The Dow Jones Industrial Average Index rose by 1.9% over May as a whole.

The European Commission raised its forecast for economic growth in the eurozone to 4.2% this year and 4.4% next year, encouraged by strengthening momentum in Europe’s vaccine rollout programme. EU Commissioner Paolo Gentiloni commented: “The shadow of Covid-19 is beginning to lift from Europe’s economy. After a weak start to the year, we project strong growth in both 2021 and 2022”. Inflation is predicted to strengthen to 1.7% in 2021, easing to 1.3% in 2022. In comparison, the European Central Bank’s (ECB’s) inflation target still stands at “below, but close to, 2%”. Over May, the benchmark Dax Index climbed by 1.9%.

The UK’s annualised rate of consumer price inflation surged during April from 0.7% to 1.5%, stoked by a sharp increase in the cost of household utilities and clothing. The Bank of England (BoE) expects inflation to reach 2.5% at the end of this year, after which it is forecast to subside to 2% in 2022 and 2023. Meanwhile, the BoE predicts that the UK economy will expand at its most rapid rate since the Second World War this year, boosted by strong consumer demand and a successful vaccine programme. The FTSE 100 Index rose by 0.8% during May.

Japan’s economy contracted by 5.1% during the first quarter of 2021, fuelling worries that the country could be at risk of a double-dip recession. Sentiment was also affected by concerns over the outlook for the impending Tokyo Olympic Games, which were postponed from last year. The Nikkei 225 Index edged 0.2% higher over the month.