20 April 2022
It was a week of records that many would rather not see set, with both the UK and US clocking new inflation highs.
On home soil, new figures from the Office for National Statistics (ONS) showed that CPI inflation rose by 7.0% in the 12 months to March 2022, compared to 6.2% for the 12 months to February. While rising food, restaurant and hotel prices were noted, the ONS attributed the inflation increase mostly to the surging costs of petrol and diesel.
The elephant in the room is, of course, the sharp uplift (54%) in utility prices, which came into effect at the start of April. It’s safe to assume, then, that next month’s inflation figures will make for even less enjoyable reading than the most recent statistics.
Indeed, Ruth Gregory, Senior UK Economist at Capital Economics, predicted that CPI inflation in the UK could potentially reach 8.7% next month. She commented:
“While we suspect April could mark the peak, we think it will remain above 7.0% in 2022 and above 3.0% for most of 2023. With high inflation feeding into price/wage decisions, we think the Bank of England will have to raise rates further than it expects, perhaps to at least 2.0% next year.”
Stagflation: A short-term worry?
Concerns about high inflation and lower – or stagnant – growth has led to talk of stagflation, which is defined as a combination of the two factors. This harmed short-term confidence in equity markets, and the FTSE 100 fell 0.7% over the shortened work week in the lead-up to Easter.
That said, while markets might have reacted to the spectre of stagflation, in the long term, the situation for investors may not be so worrying. This is certainly the view of Pzena Investment Management, who committed in its latest Quarterly Report:
“Markets tend to recover quickly from geopolitical shocks, and in the one sustained period of stagflation [1973-1982] equities performed roughly in line with long-term performance, and value outperformed.”
Inflation goes global
Inflation is currently a worldwide phenomenon, which again highlighted why diversifying across geographies (as well as industries and asset classes) can help smooth performance over a longer period of time and provide some balance when one part of the market is not performing so well.
In the US, headline CPI reached 8.5%, its highest level for over 40 years. It’s driven by similar issues as the UK, and the central bank is expected to continue to increase the interest rate from its COVID-19-induced lows over the coming year.
In equity markets, the S&P 500 ended the shortened week -2.1% lower, with the technology sector remaining under pressure. The FTSE 100 performed better (despite falling), and remains up overall for the year. However, this followed a period of sustained overperformance by the S&P 500, driven by strong tech performance in 2021.
Looking further afield, the Reserve Bank of New Zealand increased its official interest rate by half a percent to 1.5% last week in an attempt to combat inflation.
Inflation was also a topic of discussion in the European Central Bank’s (ECB) Monetary Policy meeting last week. Eurozone inflation hit 7.5% in March, compared to 5.9% in February, with fingers pointing at high energy and food prices once more. That said, the ECB did not increase interest rates at the meeting. Following the meeting, ECB President Christine Lagarde said:
“In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy.”
With war in Ukraine still raging, central banks across the globe will likewise be looking to maintain an element of monetary flexibility.