Global stocks were heading for the worst week since February after a choppy period where a US inflation scare and fears of tighter central bank policy battled with bullish forecasts on the global economic recovery.

The FTSE All World index of large-cap shares across developed and emerging markets rose 1.2 per cent on Friday but was on track to close the week 1.9 per cent lower, its worst performance in almost three months.

On Wall Street, the S&P 500 index gained 1 per cent in early dealings but was also on course for its biggest drop since February after reaching an all-time high last Friday. The tech-heavy Nasdaq Composite index rose 1 per cent but was still 3.5 lower for the week.

Data on Wednesday showed US inflation rose 4.2 per cent year on year in April, sending shares tumbling worldwide as fears increased that the Federal Reserve would step in to prevent the economy overheating by tightening borrowing costs. The Fed has purchased $120bn of bonds a month throughout the coronavirus pandemic to support financial markets, while the US government has fuelled strong gross domestic product growth with about $5tn of stimulus spending so far.

A partial recovery across global stock markets on Thursday and Friday showed investors believed “buying into dips is the right strategy because it has served them very well over the past year”, said Sunil Krishnan, head of multi-asset funds at Aviva Investors. “If you believe in what monetary policymakers are saying, then it is the right thing to do.”

However, if inflation “is not that far below 3 per cent in a year’s time, you can’t escape the gravitational pull on real purchasing power for too long”, he warned.

On Friday, the University of Michigan’s monthly survey of consumer sentiment showed households expected inflation at 4.6 per cent this year, up from 3.4 per cent when they were questioned in April. The sentiment index produced by the survey fell to a reading of 82.8 from 88.3 last month.

Fed policymakers have said that jolts of inflation are likely to be transient as the effects of last year’s lockdown restrictions work their way through the economy.

“We need to be patient, steely-eyed central bankers, and not be head-faked by temporary data surprises,” Fed governor Christopher Waller said on Thursday.

Line chart of Cboe Volatility index showing Volatility expectations jump for Wall Street stocks

US Treasury bonds, which have increased in price over the past two New York sessions as investors shrugged off the inflation jitters, continued to rally on Friday.

The yield on the benchmark 10-year Treasury, which moves inversely to its price, fell 0.03 percentage points to 1.642 per cent.

Kasper Elmgreen, head of equities at Amundi, said he was “cautious” about the stock market in the near term because much of the developed world’s recovery from coronavirus was already baked into share valuations.

“After we’ve all had our first haircut and our first pint inside, what comes next?” he said, pointing out that China’s early economic rebound from the pandemic was followed by a stock market correction in late March, as traders banked gains and anticipated inflation.

In Europe, the Stoxx 600 regional share index rose 0.9 per cent but remained 0.8 per cent lower for the week.

The dollar index, which measures the greenback against a basket of major currencies, fell 0.5 per cent after US retail sales unexpectedly stalled in April. The euro rose 0.5 per cent against the dollar to purchase $1.2143. Sterling rose 0.4 per cent to $1.4105.

Brent crude, the international oil marker, rose 2.1 per cent to $68.43 a barrel.