Produced by Alessia Giustiniano. Filmed by James Sandy.
A huge sell-off in equity markets, and inflation is apparently to blame. Why does inflation matter? Well, if inflation goes up, then central banks raise interest rates. And if interest rates go up on safe assets, then risky assets, such as equities, become less valuable. So is inflation really rising across the world?
The catalyst for the stock market downturn were US wage figures about a week ago. These showed US wages rising at an annual rate of 2.9% when market expectations were about 2.6%, 2.7% - a lot higher than expected, and the highest rate since 2009. Put that together with the booming global economy, and you have the recipe for inflation rising across the world.
Now, let's have a look at how fast the global economy is rising. The International Monetary Fund thinks the world economy will expand by 3.9% this year, the fastest rate since 2010. Other people think it's growing even faster. Fulcrum Asset Management, for example, who do nowcasts - say what's going on right now in the economy - think the global economy is growing at a rate right now of over 4 and 1/2%. And advanced economies - US, Britain, eurozone, Japan - are growing together at a rate between 3% and 3 and 1/2%. That's far faster than they can sustainably grow in the long term and likely to put pressure, upward pressure, on inflation.
But, is there really a lot of inflation about? We haven't really seen it in the inflation figures in the US even though wage growth is rising. And when we look at the eurozone, we actually see that trends in inflation are beginning to fall. Inflation rose this time last year as previous oil price falls fell out of the annual comparison. But since then, it hasn't continued to rise. In fact, inflation has been declining, down to 1.3% in the latest figures.
So when you look at the whole global picture, you really see a much more muted inflation outlook yet. So, although stock markets have taken this as a reason to sell off, I don't think yet we can say that inflation is rising across the world and central banks are going to have a materially different policy.