WeeklyWatch – August saw UK inflation climb to 3.2%

21 September 2021

Stock Take

Base effects

It transpired last week that the annual rate of consumer price inflation in the UK had climbed to 3.2% in August. This level represents the highest monthly jump in inflation in nine years – furthermore, it easily exceeds the Bank of England’s 2% target.

The main reasons why investors are focused on inflation are that, firstly, it eats away at the value of savings over time, and secondly, if its rise is maintained, there’s a good chance that a period of higher inflation will cause governments and central banks to amend their policies accordingly. These policies (for example, low interest rates) have supported asset prices since the pandemic broke out last year.

Markets are now gauging what the Bank of England’s probable next move will be in this environment. John Higgins, Chief Markets Economist at Capital Economics, thinks that inflation may increase as the year goes on:

“In the UK, the jump in consumer price inflation from 2% in July to 3.2% in August is probably the first step in a rise that may take inflation to around 4.5% by November,” he wrote. On the other hand, he also proposes that August’s jump can broadly be attributed to ‘base effects’ – in other words, inflation statistics are usually based on the same month one year ago, and can seem large in comparison when impacted by unprecedented events, such as the pandemic.

“While most of the rise [in August] was due to base effects, there were some signs that underlying price pressures are strengthening. We expect inflation to fall sharply next year as base effects fade, which underpins our forecast for the Bank of England to hold off raising [interest] rates until mid-2023.”

Compelling figures

US markets were likewise engrossed by the possibility of rising inflation last week, falling to their lowest level so far this month. On Friday, the S&P 500 index dropped around 0.9%, and the more tech-heavy Nasdaq Index fell the same amount. The Federal Reserve (the US central bank) is due to meet this week, and it’s anticipated that this will give an indication about the timings around when it will start tapering its bond-buying programme (which has supported markets throughout the pandemic).

Evergrande crisis

Finally, Asian markets were gripped by the tale of Evergrande last week. A major Chinese property developer listed in Hong Kong, its share price dropped heavily since it communicated that it was at risk of default last month. Its future is in doubt, given that substantial debt repayments are imminent.

The event has already brought about some agitation in wider markets, and is likely to have further repercussions, says Martin Hennecke, Asia Investments Director at St. James’s Place.

“Given the size of China Evergrande and its debt pile, it is only natural if not inevitable to witness a degree of contagion, and indeed we have already seen this – for example, in the average yield on Chinese junk bonds having risen to an 11-year high, while property prices appear to be cooling against the backdrop of concern about inventory coming onto the market at discounts.

“There has been much speculation about how deep contagion may go, however, and ultimately that is likely to depend on any actions being taken (or not taken) by the central government, which is difficult to predict at this stage, as it seeks to balance the campaign of moral hazard reduction with social and financial stability.”

Yet Hennecke also points out that China’s banking sector is on good form relative to global standards – this should assure investors that the country is able to support the economy from any wider fallout.

He concludes:

“On a macro-level, China’s fiscal position and financial reserves are strong, in part since COVID-19 related stimulus have not been forthcoming nearly as generously as in most Western countries, all of which suggests that financial resources to deal with potential fallouts of significance are at hand, if and when it should be decided to use them.”

Wealth Check

While rising inflation is certainly something to think about in retirement, the truth is that there are plenty of factors to consider. Last week, for Pensions Awareness Week, we pulled together lots of key information to help you successfully plan for your financial goals at this stage of your life.

In the past, reaching retirement would mark the end of the pension saving and investing journey. However, nowadays, it signals a new phase – as your plans are formulated around new priorities.

There’s a whole host of pension choices to make at retirement, meaning it’s crucial to keep your goals and aspirations in mind in order to put a plan together.

The topic of retirement can be emotive, as it could be the start of something new as well as a source of much worry and uncertainty – and investment decisions made at this stage can be troublesome. Understanding how your emotions influence those decisions is vital.

There will also be practical questions to consider – for example, such as whether to access your pension when you retire or keep it invested during retirement.

You might be at the start of your retirement savings journey, monitoring your plans now they’re underway, or already managing your retirement income – either way, your Wellesley adviser can help you bring your retirement dreams to fruition.

 The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The Last Word

“Freedom is the very essence of our economy and society. Without freedom the human mind is prevented from unleashing its creative force. But what is also clear is that this freedom does not stand alone. It is freedom in responsibility and freedom to exercise responsibility.”

– German Chancellor Angela Merkel, who will step down from the role after 16 years following this weekend’s election in Germany.

 The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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