We’ve written here a number of times over the last few months about the likelihood of seeing higher inflation numbers in the coming months ahead following the easing of lockdowns and the likely impacts it would have on capital markets. And with CPI data being released in the last week, those higher numbers are starting to come through.
In the UK, data from the Office for National Statistics showed that the inflation rate for May rose from 1.5% in April to 2.1%, the highest rate for almost two years. The inflation rate is also now above the Bank of England’s 2% target and was well above most economists’ forecasts for an increase of about 1.8%. This was seen as a bigger than expected rise and we could see the inflation rate rise faster and higher over the coming months than previously thought. The rise was driven by the rising cost of fuel and clothing as the easing of lockdown sparked a rise in consumer spending.
Elsewhere, the US saw consumer prices hit 5% in May, the highest in almost 13 years, after President Biden proposed a $6 trillion stimulus package, while Eurozone inflation rose to 2%, the first time the rate has surpassed the European Central Bank’s target in more than two years.
For some, seeing these higher inflation numbers coming through will be seen as whether it is time to start raising interest rates again, but central banks seem committed to keeping rates low for the foreseeable future. The Fed has already said that it expects to keep rates close to zero until 2023 and will allow the economy to run “hot” until then. The Bank of England has said that it expects inflation to hit 2.5% by the end of the year before settling back to its 2% target as the impact of post-lockdown price rises fades. However, if inflation pressure were sustained into next year, we could start seeing interest rate hikes to help reduce rising prices.
Despite the higher than expected numbers coming through, capital markets didn’t seem to be too affected and saw little change, as there is widespread belief that the upward pressure on prices is only temporary after seeing a spike in demand after economies are re-opening and suppliers are still coming back up. The expectation is that as supply increases to meet those demands, so prices will start to fall back. We will continue to monitor those expectations and how they will impact our portfolios.