Will high inflation lead to a stock market crash? 

Inflation is only rising, creating cost pressures for companies. But is it high enough to lead to a stock market crash?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

We are only two weeks into 2022 so far. And it is already becoming clear that inflation could be the one big risk to my investments this year. Concerns on inflation have been building up for quite a while. Companies have flagged rising cost pressures for around a year now. They appear to have been managed well so far, but inflation is only rising. And now it has risen enough for me to speculate about whether it could actually lead to a stock market crash. 

How big is the inflation problem?

The UK’s last inflation print, for November 2021, stood at 5% on a year-on-year basis. And the next one due soon is expected to be even higher. And inflation is hardly just a phenomenon restricted to this country. The US too, saw a pretty ugly inflation report earlier this week. Consumer prices rose to the highest levels in 40 years at 7%. Considering that many FTSE 100 companies have globalised interests, high inflation is particularly bad news. If it was restricted to just one country, geographical diversification could have softened the blow. But the cushion is not there now. 

Fiscal stimuli’s double-edged impact

Part of the reason for the increase in inflation is high government spending. The stimulus provided during the pandemic resulted in high commodity prices, which at the time was good for the likes of FTSE 100 miners like Evraz, Rio Tinto, and Anglo American. But it also resulted more generally in higher inflation. In its trading update, sportswear retailer JD Sports Fashion estimates that some £100m of profit increase could have accrued just from the US government’s stimulus in the past year. 

As the effects of these stimuli wear off, inflation could come off too, of course. But it might just have a cost associated with it. Government spending was helping the economy sustain itself during a difficult time. There is no way of knowing whether the recovery will be robust even after the stimuli are withdrawn. So far, the UK has shown only tepid recovery and forecasters’ bullishness on US growth has also reduced in recent months. So in effect, we could be looking at muted growth as inflation is brought under control.

The likely outcome

However, even this is better than the possible impact if inflation continues to rise. It could result in a sharp growth slowdown, which in turn could well lead to a stock market crash, in my view. I do believe, however, that while the risk exists, its probability is unlikely to be high as policies are put in place to counter this possibility. I think the more likely effect of high inflation could be occasional pullbacks in the stock markets. This could be because of an impact on investor sentiment or due to companies’ results being impacted by high prices or both. 

Keeping this in mind, as an investor I do not see any reason to be deterred from buying FTSE 100 stocks. As long as I have a medium to long-term time frame in mind, I think inflation could well even itself out over time. If there are any dips in quality stocks in the meantime, I would buy them. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Manika Premsingh owns Anglo American, JD Sports Fashion, and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

When will the Rolls-Royce share price recover?

The Rolls-Royce share price may be down, but cash flows are surging! Zaven Boyrazian explores how long it could be…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

1 dirt-cheap FTSE 100 stock I think could TRIPLE my money!

Demand for lithium is forecast to surge by 42 times, enabling this FTSE 100 stock to potentially supercharge its profits…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in the FTSE 100 – or try to beat it?

Our writer has the option of investing in a FTSE 100 tracker fund. So why does he choose to buy…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£1,500 to invest in a Stocks and Shares ISA? Here’s how I’d do it

Our writer has been investing in his Stocks and Shares ISA. Here he details how he could put £1,500 in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

2 top FTSE 100 shares I’d buy before the market rebounds!

Christopher Ruane identifies a pair of FTSE 100 shares that have both tumbled in the past year and that he…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Here’s why the next bull market may have already begun

The UK stock market has taken the Bank of England's interest rate hike in its stride and green shoots suggest…

Read more »

Gold medal
Investing Articles

No contest! Here’s my stock of the week

An update from this company offered some relief from the economic gloom. It's this Fool's stock of the week.

Read more »

Cogs turning against each other
Investing Articles

Scottish Mortgage shares are back on the rise: is now the time to jump onboard?

Scottish Mortgage shares have risen over 25% in the past 30 days. This Fool takes a look at why and…

Read more »