Are we at Peak Inflation ?
Jill Turner - Ethical Pension Specialist
Chartered Financial Planner and IFA at Big Picture Financial Planning Embracing Ethical & Sustainable investing
In my previous article,?I explored the reason why we have a spike in inflation, the million dollar question now,?is whether we have reached the peak of inflation and worryingly if high inflation is here to stay.? We can then look at the longer term outlook and?the impact on our savings, investments and pensions. ?
If you missed the last article, this quote from Peter Michaelis, head of sustainable investment at Liontrust sums up where we are in the economic cycle, with an efficiency of words that evades me.
“ On the macro front, we have seen a significant change in approach from many central banks, moving more hawkish on interest rates as they look to bring soaring inflation under control.?This rising inflation is a consequence of loose monetary policies, designed to boost economies after covid lockdowns, as well as supply issues caused by the latter, and the war win Ukraine has exacerbated some of these economic maladies.?Given this backdrop, there is growing talk of potential recession and slowing global growth” ?( Michaelis?P 2022 )?
Hello, my name is Jill, Director and Life Centred Financial Planner at Big Picture Financial Planning, working with clients to plan for their future, have the best life possible with the money that they have, align their investments with their values, manage risk and protect the ones they love.?
We have had some financial shocks and now we are seeing the consequences.?
A term that seems popular parlance amongst the fund manger types, at the moment is “hawkish”. ? If you've not heard it before, let me relay how it was explained to me. ?All central banks have two primary goals: controlling inflation (hawkish) and maximising employment (dovish).?When a statement or policy is labelled?hawkish it tends to mean that the policymaker is choosing to use high-interest rates to curb inflation. Hawkish policies tend to generally ignore economic growth impacts but support an economy operating at a level below its full-employment equilibrium. Therefore in recent times, central banks have been embracing a hawkish monetary policy as they have tightened the money supply by raising interest rates in an attempt to control pricing and fight inflation against a back drop where supply cannot be met.
This leads to a further question, whether this is too hawkish and a recession follows or whether they are not being hawkish enough. So much depends on supply-push inflation from supply chain difficulties, not being able to import enough finished goods, rising food and energy prices.?Demand driven inflation was beginning to work itself out of the system until the?war in Ukraine.?The impact of which is felt more acutely in Europe,?where there is a heavy reliance on Russian Gas.?Belarus, Bosnia and Herzegovina, Norway and Serbia – each importing about 99 percent of their natural gas from Russia.?(Al-Jeezera 2022?)?The driving forces in the reduction of energy prices and thus supply-push inflation, will be the duration of the war in Ukraine and the length of time it takes to find alternative energy supplies, preferably from our perspective,?through?investment into the production of more renewable energy. In spite of this the Bank of England’s monetary policy committee have however, made projections.?
Source :?Monetary Policy Report May 2022?- Bank Of England? There are many caveats attached to the chart and these are best viewed at source.
CPI inflation is likely to rise to 10% by the end of the year due to continued import and supply chain pressures and a further rise to the OFGEM price cap.?The government are proposing financial assistance with one off payments to households and are considering the removal of VAT on domestic fuel bills. ?Those of us with loans and mortgages will see payments go up because interest rate increases will remain a tool to continue to reduce the demand - pull inflationary pressure down and the Bank of England Monetary policy committee expect inflation?to fall next year and then be close to their target of 2% by Q2 2024. ?
So a bumpy couple of?years ahead.?
As I write this article 60 plus members of the current UK government have resigned creating an internal election amongst the governing parliamentary conservative party to elect a new leader and thus a new prime minister. Depending on who is elected there could be a number of policy changes.?There is talk of tax cuts, perhaps a reversal of the increase in the recent National Insurance payments coupled with a reduction in corporation tax in order to stimulate growth.?However, with more money in circulation,?demand-pull inflation could increase and the benefit of the tax cuts nullified. ?We need to wait and see.?
Predictions can change in an instance and I am reminded of the following quote from?Dr Laurence J Peter, the Canadian author of the book, the Peter Principle- Why Things Always Go Wrong. ?
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.??
Dr Laurence J Peter?
It is important to remember, just as we can’t time the stockmarket, we can’t reliably forecast the future economic background. Economists give it their best shot and interpreting the indicators and their projections can give is heart if treated as tramlines. ?As always though, the focus remains on how best to achieve your own objectives and financial resilience, come hell or high water,?the subject of?the third in this trilogy of articles.?
Sources :
Jill Turner is Director of Big Picture Financial Planning, who offer independent financial advice as an appointed representative of Valid Path Ltd., who are regulated by the financial conduct authority.? Jill is a member of the Personal Finance Society, a chartered associate of the London Institute of Banking and Finance and a member of the UK Sustainable Investment and Finance Association and currently serves on their policy committee.
This article is for information and does not constitute advice. The value of investments and the income generated from them, can go down as well as up and your capital is at risk.