Stagflation fears hit sentiment

13th October, 2021

Confidence takes a hit: investors were stalked during September as the spectre of stagflation manifested itself against a backdrop of rising prices and lacklustre growth prospects. The yield on the benchmark UK government bond rose above 1% for the first time in over two years, and the pound slipped against the US dollar to its lowest level since December 2020. Consumer confidence fell sharply during September, according to GfK, undermined by higher prices, shortages in shops, and the prospect of an end to the furlough scheme. The FTSE 100 Index fell by 0.5% over September, while the FTSE 250 Index dropped by 4.4%.

A rising tax burden: the Government revealed a “Health and Social Care Levy” early in the month in a bid to subsidise rising social care costs. The levy will take the form of a controversial 1.25% increase to National Insurance contributions (NICs). The Confederation of British Industry (CBI) criticised the move, saying that it could threaten the UK’s economic recovery, while the British Chambers of Commerce (BCC) warned that it might prove a “drag anchor on jobs growth”. Alongside the rise in NICs, the Government also announced a 1.25% increase in tax on dividend income.

Surging inflation: consumer price inflation rose from 2% to 3.2% year on year during August, although the record rise was distorted by the impact of last year’s “Eat Out to Help Out” discounts. According to Bank of England (BoE) policymakers, a “material” increase in gas prices is likely to stoke inflationary pressures, and higher energy costs are set to drive inflation above 4% towards the end of 2021. The BoE also expects ongoing supply constraints to curb economic growth during the third quarter. Looking ahead, the possibility of “some modest tightening of monetary policy” appears to be moving a little closer.

Lacklustre growth in July: the UK economy expanded by only 0.1% during July, remaining 2.1% below its pre-pandemic peak. In a speech, BoE Governor Andrew Bailey commented: “The switch in demand from goods to services … has not take place to date on the scale expected”. Meanwhile, the rate of unemployment eased to 4.6% during the three months to July, and job vacancies hit their highest level on record, breaching one million. Elsewhere, average wages rose by 6.8% (excluding bonuses) over the same period.

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