How Persistent U.S. Inflation Has Major Consequences for Global Markets

The consumer price index (CPI) in the U.S. was 8.2% in Sept., higher than the 8.1% predicted, leading to fears that the Federal Reserve’s policy of stringent fiscal tightening to lower inflation will continue to at least the end of the year.

U.S. markets responded negatively to the latest inflationary update with S&P 500 dropping 2%. U.S. government bond yields spiked, and two-year Treasury yields soared to 4.5%.

Crypto markets fared little better as Bitcoin fell by 4% within an hour of the announcement, while Ethereum dropped over 6%.

U.S. Inflation Spells Bad News for Pound, Rupee and Euro

In the United Kingdom, the FTSE 100 dipped by 1.65% as the British market reacted to CPI report. With U.S. inflation still at runaway levels The Federal Reserve is expected to impose another interest rate hike in Nov.

That will inevitably lead to a strengthening of the dollar at a time when other fiat currencies including the pound, rupee and euro are looking increasingly weak. 

With many commodities priced in dollars, a strong U.S. currency is typically bad news for emerging economies, but even supposedly mature economies such as the U.K. are being severely tested.

Policymakers in the U.K. are now increasingly concerned about the weakness of the pound which is at historically low levels.

In the United Kingdom, the deepening sense of crisis has led Prime Minister Liz Truss to announce Jeremy Hunt would be taking over as Chancellor of the Exchequer (the U.K.’s Treasury chief) on Friday.

Hunt will be the fourth person appointed to the position in as many months, and will hope to last longer in the role than his predecessor Kwasi Kwarteng. 

Kwarteng only managed a humiliating 38 days in the role after unveiling a raft of spending pledges and tax cuts that caused chaos in U.K. bond markets and sent shockwaves across the Atlantic.

A Difficult Balancing Act for the Market

The Fed now finds itself in a difficult position. The central bank must lower inflation in the U.S. but its attempts to do may yet run the risk of destabilizing international partners and markets overseas. If that were to happen, the Fed’s attempts to curb inflation could yet be their undoing.