WeeklyWatch – US inflation rates hit highest level in four decades

15 February 2022

Stock Take

Increasing inflation

Financial markets in the West wavered last week, after US economic figures revealed that inflation hit 7.5% in January.

At the highest level of inflation in the US since 1982, there are concerns that households are about to experience significant pressure on the cost of living.

Increasing inflation can also cause costs to rise for companies; however, Martin Hennecke, Head of Asia Investment Advisory & Comms at St. James’s Place, reflected that the effects of inflation aren’t always even:

“Companies with an edge in the market typically can at least pass on rising input costs to consumers in the form of higher prices charged for goods and services delivered, and hence provide a degree of inflation protection for investors in the long run.

“In December, a report by the Federal Reserve Banks of Richmond and Atlanta confirmed this in a Chief Financial Officer survey, which found that “the overwhelming majority (about 80%) of firms experiencing these unusual cost pressures, are passing on at least some of these cost increases to customers through higher prices.”

With inflation continuing to increase, there are growing expectations that the US Fed will take a more aggressive stance when it comes to upping interest rates. No easy task for any central bank, with economies remaining fragile as they gradually end their COVID-19 restrictions. Gordon Shannon, Partner, Portfolio Management at TwentyFour Asset Management, commented:

“Today, central bankers’ task is all the more difficult because inflation isn’t their only concern; controlling it must be balanced against preserving a global economic recovery that is beginning to look more fragile. It is a fine line policymakers must tread, and for investors, it raises the risk that central banks could end up being either too dovish or too hawkish.”

On home soil

The UK will reveal its January inflation figures in the upcoming week. Although these have historically been a bit lower than the US numbers, they have followed a similar pattern, and will likely point to continued pressure on inflation throughout the UK economy.

The Bank of England has already raised interest rates once this year, and many are predicting that there are more rates increases to come, given the high levels of inflation. Even if the Bank were to raise interest rates, they remain well below the current rate of inflation.

The impact will be felt across households, says AXA’s David Page:

“Over the coming months, the challenges to real incomes are likely to dominate, National Insurance increases and the utility price hike in April and general price increases are set to weigh on the consumer and provides a challenging outlook for growth. We expect that the drawdown of savings accumulated over the pandemic will bolster consumption – though this is unevenly distributed across households.”

Market performance

Rising inflation and interest rates have contributed to an unpredictable market, with some sectors performing well so far in 2022, and others struggling.. Alex Correia, Senior Equity Analyst at St. James’s Place, says investors should not panic when volatility hits and expect short-term corrections now and then. He adds that they have historically done little to dampen long term returns on equities.

He adds that we are now seeing a rotation, where a different set of markets and sectors are starting to perform compared to those in recent times. For example, he notes:

“We saw a very pronounced trend where US growth [stocks] had been outperforming the rest of the market over the last five years, but over the last quarter we’ve seen that start change.”

Instead, so far in 2022, the FTSE has begun to witness stronger performance. Correia says this is the time where active managers can prove their worth. He says:

“When you have a market that is only moving in one direction, it’s very difficult for an active manager to distinguish themselves and add value. A volatile market with different asset classes or companies heading in different directions is a fertile feeding grounds for an active manager.”

TwentyFour Asset Management and AXA Investment Managers are fund managers for St. James’s Place.

Wealth Check

There are times in life when you might be attempting to juggle your own financial needs while also getting things in place for your children. Or you may need to consider elderly parents with a range of different, complex financial needs, too.

You’ll need as much help as possible with so many competing priorities, so it makes sense to take advantage of the opportunities that are right in front of you.

Though you may be using some of your tax allowances and reliefs already, are you getting the full benefits from them? Even the allowances we’re most familiar with, such as the annual ISA allowance, can lift some of the weight off your shoulders when you’re trying to keep everything moving.

Planning for future generations

Junior ISAs, for example, are a tax-friendly way of building up a pot of money that children can access when they turn 18. Tony Clark, Senior Propositions Manager at St. James’s Place, says:

“You might also be thinking about helping them get into university, deal with student debt and get on the property ladder. Today’s teenagers may face working and retirement lives that are very different from those we’re experiencing, so giving them a head start can really help as they enter the working world.”

Pensions are also invaluable from a tax perspective, knowing how pension tax relief in particular can make your investment grow over time.

The tax benefits on pensions mean that even very modest amounts paid in to a child’s pension fund from a young age can benefit your children later in life – something to seriously consider even though it might not seem really important right now.

“Giving them a leg up in their adult life as well as setting something up for later in their lives can really open up their choices when they begin to approach retirement,” says Clark.

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 levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

The Last Word

“The two leaders agreed on the importance of continuing to pursue diplomacy and deterrence in response to Russia’s military build-up on Ukraine’s borders.”

– What US President Joe Biden told Ukrainian President Volodymyr Zelenskyy on the phone over the weekend, amid heightened Russian tensions, according to White House Officials.

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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