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How would inflation, rate hikes impact ASX in 2022?

ASX 200 has had an exceptional run in the past few months. It rose by 13% in 2021 and over 54% since lows due to the COVID-19 pandemic in 2021. So, investors are skeptical about the benchmark market index continuing its winning run and expecting a brutal dip in 2022.

A correction is expected from inflation or the current Omicron strain of COVID-19. So far till Thursday’s close, the ASX 200 was down 1.5%.

Will Inflation be a trigger for the stock market correction?

Consumer prices in the US rose in 2021 by the most in the last four decades. Against this evolving backdrop, a stage has been set for the start of the Federal Reserve interest-rate hike as soon as March. The consumer price index climbed 7% in 2021.

The prices have mainly risen during the recovery from the COVID-19-induced recession as Americans have ramped up spending on goods, including cars, furniture, and appliances.

Source: © Stbernardstudio   | Megapixl.com 

However, the Reserve Bank of Australia (RBA) is set to tolerate higher temporary inflation, after remaining below its 2%-3% target for years. In order to be convinced of sustained inflation pressures, the Australian central bank would wait for the wage growth of more than 3%.

According to analysts, the RBA would also raise interest rates sooner than the late 2023 or 2024 timetable, when it had signalled if prices and wages picked up faster like the rest of the world.

What would be the impact of US rate hike? 

In case the Fed plans to taper its bond buying program more quickly than earlier anticipated and also raises interest rate sooner, Wall Street may witness a sell-off. Global markets, including Australia, follow suit generally when that happens.

Experts are also of the view that a higher interest rate scenario would be a negative for high-growth stocks such as tech stocks.

Meanwhile, a section of optimists believes that Australia’s upcoming profit season in February could witness benefits of low interest rates, China’s robust demand for iron ore and the release of pent-up demand as the economy opens. However, a lot depends on how Omicron concerns shape up going ahead.

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