WeekWatch -‘The rate of inflation continued to rise last week, as figures from both the US and UK hit new high’ April 22
The rate of inflation continued to rise last week, as figures from both the US and UK hit new highs.
In the UK, CPI inflation rose by 7.0% in the 12 months to March 2022, according to figures from the Office for National Statistics (ONS). This compared to 6.2% for the 12 months to February. The ONS described the rising costs of motor fuel as the largest contributor to the inflation increase; however, higher food, restaurant and hotel prices were also noted.
There is a good chance that next month’s inflation figures will be even higher, as they will include the 54% increase in utility prices which came into effect at the start of April.
Ruth Gregory, Senior UK Economist at Capital Economics, said 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.”
The worry of high inflation, matched with lower growth, led to fears of potential stagflation. This harmed short-term confidence in equity markets, and the FTSE 100 fell 0.7% over the shortened work week.
While markets might have been spooked by the spectre of stagflation in the short term, according to Pzena Investment Management, in the long term, the situation for investors may not be so worrying. In its latest Quarterly Report, the investment manager wrote: “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.”
In the US, headline CPI reached 8.5%, its highest level since 1981. Similar to the UK, US inflation was driven by increasing fuel prices, with food prices also increasing. The central bank is expected to continue to increase the interest rate from its COVID-19-induced lows over the coming year.
Moving to equity markets, the S&P 500 ended the shortened week -2.1% lower, with the technology sector remaining under pressure. This highlights the importance of diversification for long-term returns.
Although the FTSE 100 fell last week, it still performed better than the S&P 500, 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. 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.
Inflation is not just limited to the UK and US but is currently a worldwide phenomenon. For example, 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 noted by the European Central Bank (ECB) at its Monetary Policy meeting last week. Eurozone inflation hit 7.5% in March, compared to 5.9% in February, with high energy and food prices again being named as a key driver. 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.
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