Inflation may be peaking in the US, but will likely remain damaging

Anthony Rayner

Premier Miton Macro Thematic Multi Asset Team

Inflation may be peaking in the US, as evidenced by US producer prices, but is also increasingly apparent at a consumer price level in the US. As a result, markets have responded positively, and logically, in that they are pricing a slightly faster reduction in US interest rates. This has led to assets experiencing a broad-based rally, while the US dollar has weakened. The much anticipated ‘Fed pivot’ is in play, even if Fed members are keen to reign in overly optimistic market expectations.

As we have argued previously, we think it fanciful to believe that inflation, and therefore rates, will quickly fall to, and then stay at, pre-Covid levels. This is because there are some relatively new forces that are now dominating the inflationary environment, most importantly deglobalisation and resource supply constraints, both of which are inflationary.

As an example, take semiconductor chips, which are the lifeblood of many industries and one of the most traded products globally. New US chip export controls, intended to stymy Chinese progress in artificial intelligence and advanced military equipment, will likely decouple this complex global supply chain and apply upwards pricing pressures.

As a result of the inflationary environment, we believe that interest rates will stay at relatively high levels, even if they peak in June of next year, as markets currently expect. Indeed, markets still have US rates at about 4.7% by the end of 2023, above current levels, and above levels all the way back to 2007. All of which adds to the accumulative impact of high rates. The source for these US rates estimations is Bloomberg as at 25.11.2022.

So, even though markets are embracing the Fed pivot, we think it’s important to remember that rates will most likely remain at relatively high levels for an extended period. Importantly, something normally breaks during a Fed hiking cycle, and certainly big tech and crypto have come under pressure, but the longer rates remain elevated the more areas come under more pressure.

US inflation and rates are of course most relevant for financial markets but economies, and therefore their monetary policies, are increasingly marching to different drumbeats. Take the UK, for example. Then consumer price inflation looks much stickier than in the US, even if UK producer price inflation has shown signs of rolling over.

In terms of damage, the scale and duration of UK inflation means it is applying increasing pressures beyond the first-round effects on profit margins and consumer spending, specifically through days lost due to strikes.

The graph below looks at strikes in the UK over history. There are similarities in context to the 1980s and now, such as unions demanding higher pay rises to keep pace with inflation.

Source: Office for National Statistics data to September 2022

However, for several reasons, such as introduced legislation and reduced trade union membership, we don’t expect a return to levels seen in the 1980s. Nevertheless, working days lost due to labour disputes in the UK are close to a ten year high and spreading across industries, while pressure on nurses and teachers to strike remains. This will apply both economic and political stress and will unlikely dissipate as soon as we get a peak in UK inflation.

In short, just because inflation in the US may be peaking, it doesn’t mean that the difficult period for markets, economies and politicians is drawing to an end. Furthermore, the damage is not consistent globally. We highlighted above the divergence between US and UK inflation, but in Asia inflation has generally been much less elevated, with producer price inflation in China actually moving into deflationary territory last month. These divergent economic performances increase the opportunity for portfolio diversification, especially for flexible global multi asset funds.

How would you rate the information in this article?

Click on a star to rate it.

We are sorry that this post was not useful for you.

Write your comments here:

Tell us how we can improve this post?

Risks

Past performance is not a reliable indicator of future returns.

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

OO8248/251122

Stay up to date

Sign up to receive the latest articles straight to your inbox

Main Disclaimer

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

The content you are trying to access is intended for investment professionals only.

Please use the button below to return to the hompage.

Main Disclaimer

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >