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15th October 2021
Copia’s thoughts on Inflation
A relaxed read on the issues of the day
Inflation numbers have been rising this year, in the UK and globally. We saw this first in the US as inflation ticked up above 2% in March and it has been hovering around 5.3-5.4% for the last three months. It’s been a similar story here in the UK with inflation recently climbing to 3%. An increase in inflation had been anticipated by markets and when we look at the factors driving the numbers we can see a lot of the increase is connected to the reopening of the economy and a recovery in prices (which had fallen dramatically in the crisis). Here are a few examples:
Commodity prices – having flirted with negative territory last year, the oil price has rebounded as economies have reopened this year and is currently above $80 per barrel. Price increases have also affected gas and metals.
Used car prices – prices fell sharply in 2020 but have increased significantly this year. Price moves were further exacerbated by car rental businesses which, having released cars into the used market last year, have subsequently been trying to buy quality used cars this year as new cars have been in short supply.
Supply chain disruption – with vaccination programmes supporting reopening in US and Europe, demand has outstripped supply from Asia and EM, where covid continues to impact production capacity. Shortages, coupled with higher freight costs have resulted in price increases for goods across numerous industries.
In the UK specifically, the Eat Out To Help Out scheme subsidised diners in August 2020 but contributed to the higher inflation figure for August 2021. Going forward, the impact of these factors on the inflation numbers should begin to wane as they are exceptional moves or one-off in nature and we are not expecting the oil price (to take one example) to go up in the same way again over the coming year. The disruption to supply chains looks set to continue well into 2022, but as vaccinations continue to be rolled out, production should pick up and pressures should ease. Therefore, in financial markets the expectation is that the inflation numbers will peak around the end of the year, before beginning to fall back in 2022.
That’s not to say that there is absolutely no risk of higher or more persistent inflation. Labour shortages could lead to wage increases; and shelter and energy, which are important components of the headline figure could prove to be quite stubborn.
Overall, however, the consensus is that inflation is moving towards its peak but its current drivers will start to fade and consequently we’ll see inflation returning to levels we are more familiar with rather than remaining elevated over the longer term. Of course, we’ll continue to monitor the outlook and discuss this with clients, adjusting portfolios as the conditions evolve.