US PPI release highlights inherent inflation risk

US PPI inflation amplified ongoing concerns that the Fed may need to begin tapering sooner than many had expected. Meanwhile, a welcome rise in UK GDP comes with the caveat that things may ease somewhat after an initial reopening boom. 

• US inflation concerns stifle stocks 
• Energy prices provide key concern for Biden 
• UK continues to grow, yet NIESR highlight potential slowing growth after reopening boost 

A second batch of US inflation data in as many days has provided a more cautious approach for US markets today. Yesterday saw a monthly core CPI figure of 0.3%, with the recent boom in used car prices apparently over. However, today’s PPI inflation report highlighted how factory prices continue to rise thanks largely to rising energy prices. Undoubtably, both CPI and PPI readings have highlighted the importance of energy prices, with Joe Biden’s call for OPEC to ramp up production seemingly falling on deaf ears. For traders, the concern over rising inflation comes in relation to monetary policy, with the Fed likely to remain concerned that the prolonged period of elevated prices could necessitate a swift tapering strategy. However, Biden and Yellen will also worry about the impact rising inflation will have upon the economic recovery, with the spending capability of an everyday consumer undoubtedly impacted by a 50% rise in gasoline prices over the past year. 

UK stocks lost ground despite an encouraging 4.6% growth rate for the second quarter of 2021. The reopening efforts undertaken in the UK have undoubtedly provided the basis for a rapid economic fight back, with the UK hoping to live up to the IMF expectations that they will outperform many European peers this year. Nonetheless, the forward-looking NIESR GDP estimate does highlight the risk that growth begins to taper off from here, with the decline from 4.8% to 3.9% signalling that the recovery may not prove long-lasting in nature. While the US has the benefit of a free-spending Joe Biden at the helm, the UK recovery will be based on the hope that Rishi Sunak and the Bank of England remain highly supportive throughout 2021.