Inflation remains a menace
1st July, 2022
Central banks have made it clear that they consider inflation to be a greater menace than inflation. The Federal Reserve raised interest rates by an aggressive 75bps in its latest meeting and there are expectations rates will hit 3.4% by the end of the year. The Bank of England and ECB are making similarly hawkish noises. There appears to be no let up in inflation and therefore rate rises.
Are there any signs that inflation might be peaking? There was a brief flurry of excitement as US CPI dipped slightly in April. However, it reaccelerated in May, suggesting that this is likely to be a protracted peak. In the UK, some comfort can be taken from the fact that inflation was at least in line with Bank of England expectations, rather than outpacing it.
It is possible that supply starts to normalise as other sources of energy and agricultural commodities come on stream. Even though parts of Asia are still wrestling with the pandemic, supply chains across the world are starting to normalise. At the same time, weakening growth should curb demand.
Nevertheless, there are still many variables. The war in Ukraine appears likely to be prolonged and the supply of fossil fuels could be disrupted for some time. There is still the potential for escalation of the conflict, which would do more damage. Covid remains in the background.
There remain few, if any, concrete signs that inflation is peaking: there is a plausible scenario in which the Ukraine situation starts to resolve, supply chain problems ebb and demand falls quickly. At this point, central banks would need to rethink. However, it is too soon to predict it today.
As such, the economic (and financial market) pain caused by higher inflation is likely to have further to run. It is difficult to see anything but volatility in the second half of 2022. The only cheery note for investors is that valuations now look far cheaper than they did a year ago. They could go cheaper, but we may be closer to the end than the beginning.
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This article was sourced from Adviser-Hub.co.uk.
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