Abacus | Stock meltdown: have we entered The Age of Inflation?
The slump in stock prices is far from irrational – it is based on fears that the world economy is making a once in a generation shift from disinflation to inflation. And there’s reason to believe those fears are justified
Just six weeks into 2018, the bull run in global stock markets has abruptly crashed to a halt. After a banner January, in which stock prices seemed only to go up, investors suddenly took fright. Over the first 10 days of February, stock markets around the world tumbled steeply, more than erasing all the gains they made in the first month of the year.
To add insult to injury, the sudden sell-off was triggered by what would normally be regarded as positive economic news. Many commentators took this apparent perversity as a sign of policymakers’ failure to fix a financial system that remains prone to dangerous and irrational swings a full 10 years after the outbreak of the global financial crisis.
They have a point about policymakers’ failure, especially given last week’s collapse of leveraged funds speculating on declines in market volatility.
Good news, Asia: This time, stock market flu is evenly spread
But this month’s slump in stock prices is far from irrational. Underlying investors’ nervousness is a growing fear that the world may be entering a new economic age, the like of which it has not seen for more than 35 years: an age in which inflation, rather than disinflation, is the dominant monetary force. If this fear proves to be justified – and there are reasons to believe it may be – then the sell-off of recent days is not only rational, it could well be the start of an extended period of pain for financial market investors.
One heavy hint was the immediate trigger for the stock markets’ sell-off: news that the American economy continues to create jobs at a robust rate. US employers took on 200,000 new workers in January, more than economists had expected. What’s more, US bosses are also giving their workers pay rises. Average hourly wages rose by 2.9 per cent over the 12 months to January, the fastest increase since the 2009 recession. In response, selling pressure pushed the benchmark US S&P 500 stock index down by 9 per cent over the following week, with the scare rapidly spreading around the world by contagion. In Asia, Hong Kong’s Hang Seng Index dropped 10 per cent, as did markets on the mainland.
At first glance the rout looks perplexing. Steady growth in the US is creating more jobs for American workers. With unemployment low, the resulting demand for workers is pushing up wages as bosses compete to attract and retain recruits. And more people in work coupled with higher pay means stronger demand and more consumer spending.