Rupert Thompson, chief investment officer at Kingswood, says the published inflation number will soon begin to fall as it is based on annual averages, but he is sceptical that inflation will fall to a level that is below the growth in wages.
He says growth is slowing “everywhere” in the world, and that even central bankers themselves are “not confident” that they can prevent a recession even as they strive to tackle inflation.
Thompson notes one of the reasons inflation has risen to its present very high levels is that companies have so far been able to pass price increases onto customers, but he says that as wages consistently rise by less than the prevailing inflation rate, this capacity to pass on higher prices will diminish, with the consequence that price rises will begin to abate.
With this in mind, he is rather pessimistic about the returns achievable from most asset classes over the next 18 months, as companies' margins will shrink as they become unable to pass on price rises to customers.
Stimulating times
The one asset class he says can perform strongly is commodities, as such products are essential to most businesses and households, so the pricing power should remain intact.
Dall’Angelo says one of the factors that may have contributed to inflation rising as sharply as it has done is the very high rate of savings that most households built up during lockdowns.
She says this very rate of saving enabled consumers to spend even as prices rose, but that in the US we are now at the point where household savings are below long-term averages, meaning the capacity to keep spending is reduced, and aggregate demand should start to fall.
Mawby similarly takes the view that government stimulus, which has now ended, helped create the inflation, and so takes the view that inflation will soon fall anyway as the stimulus begins to exit the economy.
David Madden, market analyst at Equiti Capital, says the latest economic data from the US manufacturing sector is “concerning”, with input prices up but new orders down, and unemployment rising.
If those stagflationary trends are already present in the US, where the level of economic stimulus was highest, then it bodes ill for the levels of aggregate demand and economic growth in the rest of the world.
david.thorpe@ft.com
