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Client Update - 25th March 2022

Inflation continues to be the story this week alongside the Ukraine crisis. The UK Chancellor Rishi Sunak delivered his Spring Statement this week containing some gestures towards coping with higher fuel prices and the inflationary squeeze on household incomes, but the measures discussed have been challenged as not going far enough.

There is a chance that March will see a huge jump in inflation following the invasion fuelled spike in global oil prices. We have heard talk of a 10% year-on-year print for the US consumer price index (CPI). That would be astonishing as it would require the monthly change in the index to be around 2.6% which would be the biggest monthly increase in the CPI index since 1947. US gasoline prices have risen 21% during March and with a weight in the index of just over 3.7% that alone could contribute up to 0.78% to the monthly change. The UK and Europe are not too far behind.

It is not just about one month’s inflation data either. Markets really need to see inflation peaking to become less nervous about the rate outlook and the question is very much when will this happen? Even if we do subsequently get 10% inflation figures soon, if subsequent monthly increases in CPI are twice their two-decade average, the year-on-year rate will still start to subside. The risk is though that this could still leave 2023 inflation close to 5% which will be too high for the US Federal Reserve (Fed). What we really need is energy prices to fall rapidly and there to be limited second round price pressures from wages and other costs. If these costs don’t fall, the consumer will remain under pressure to sacrifice day to day purchases that will then put pressure on the global recovery post COVID. Falling inflationary pressures may be wishful thinking at this stage, especially as we do not yet know a timescale for a solution in the Ukraine.

The Bank of England (BoE) and the Fed rate rises of 0.25% were just as the market expected, however the hawkish dialogue that followed from Fed Chair Jerome Powell and other members of the committee has probably been more aggressive than expected in an effort to talk down inflationary pressures and to suggest that the central banks have enough ammunition to deal with it.

The BoE and the Fed have set out their stalls and certainly in the US we see rate increases at the next two or three meetings baked in. By the end of July, however, when the Fed has seen the June inflation data and will have a decent idea how the economy fared in Q2, things might be different. Markets are certainly not boring this year and there is much to think about. Often, with hindsight, when there is so much negative news around, it has often proved a good time to buy sensible quality stocks that have fallen in value and hold onto them. We are keeping our eye out.

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