The fear that haunts markets – is inflation coming back?

The fear that haunts markets – is inflation coming back?

The spectre of inflation had investors on the run last week. With no handbook to guide them on how economies behave in a pandemic, markets are struggling to predict whether a post-Covid recovery will be so strong as to bring with it a tidal wave of spending that sends prices spiralling.

Investors are spooked because rising inflation, which threatens investment and consumer spending, would need to be tamed by a rise in currently rock-bottom interest rates – and that would be anathema to markets and a corporate sector that have grown used to cheap money.

At the beginning of last week, stock markets panicked when figures suggested US inflation had already started to take off, adding to concerns that it could take hold in the UK. By the time markets closed on Friday, the panic seemed to have abated and stocks had risen. But the debate on whether inflation will take root around the world has begun. What is the likely way ahead?