Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest inflation figures from from the ONS.
“Inflation is building and is now expected to reach a crescendo of over 7% in April, heaping pressure on consumers, businesses and savers. The elevated figures we are seeing today are effectively sunk costs, reflecting prices rises which have already happened, but what’s just as concerning is there’s more inflationary pressure to come. The Bank of England expects inflation of over 5% in the next year, and on top of the 5.5% we’ve just witnessed, that adds up to a double digit hit to consumer purses in just two years.
“Despite inflation dominating the market narrative over the last six months, it’s not hugely apparent in market pricing. There has been a sell-off in the bond market, but at a yield of 1.6%, the benchmark ten-year gilt isn’t squealing that inflation is a sustained problem. Likewise, there has been a rotation away from some of the higher valued areas of the market, but hardly the bloodbath one might have anticipated if inflationary concerns had really bedded in for the long term.
“Indeed, the Bank of England reckons CPI inflation will be back to 2% by 2024. Inflation is extremely unpredictable, so it’s prudent to acknowledge that it might possibly tail off, though the Bank’s forecasting capabilities haven’t exactly won any awards in recent times. The Ukraine crisis further muddies an already blurred picture. A Russian invasion would likely send gas prices even higher, which would increase inflationary pressures, but a conflict would also act as a brake on global economic growth, which should apply some downward pressure to the inflationary numbers. The result of these two opposing effects could still be stagflation, however.
“Whether inflation ultimately falls away, it’s here today and it’s here to stay for the foreseeable future. As for savers, the average Cash ISA is currently paying just 0.34% in interest, so many people will naturally find themselves turning to the stock market to help fend off inflation. That certainly makes a lot of sense, because companies at least have the opportunity to pass price rises onto consumers. In fact, that’s largely what causes inflation, as measured by the Consumer Price Index. However, investors need to play a long game when using the stock market to beat inflation. Over the course of the year, there is absolutely no guarantee that an investment in the stock market will beat inflation. But in the long run, investing in stocks is one of the key defences savers have against rising prices.”
