Are we likely to see significantly higher inflation as we near the end of the pandemic?
Were this to happen it would be more important than ever to ensure funds are invested within asset-backed stocks and securities to ensure savings and retirement provision maintain spending power in the years ahead.
The focus is on that word ‘significantly’.
Consumer Price Inflation in 2020 ended just 0.6 per cent up.
If there is any consensus at all among economists and market watchers it is that there is likely to be an initial hike as mass vaccination programmes allow restrictions to be eased, but inflation will remain subdued in the longer term.
It is argued that recovery, at the same time that interest rates are at record lows and governments are pumping billions into economies, is a recipe for inflation this year and possibly into next.
But of course nobody knows how strung out and fragmented recovery might be given that, like flu, Covid could be with us way into the future. The other imponderable is how bad the unemployment figures prove to be, a factor likely to slow any inflationary surge.
FT Adviser recently offered a comprehensive analysis of the prospects for inflation.
Sahil Mahtani, a strategist at Ninety One Asset Management, told the website a spike was “inevitable” because more of the economy will be open, the level of demand rises and so prices do too.
Richard Scrope, equity fund manager at Tyndall Investment Management, claimed: “There is a vast amount of pent-up demand within the economy as, while many people have seen their incomes fall, others who have been working as normal throughout, have seen their incomes stay the same while they haven’t been able to spend. So it is reasonable to expect that there will be extra spending when we are allowed to, and given how little inflation there was in 2020, it won’t take much for inflation to rise sharply this year.”
Sunil Krishnan, head of multi-asset funds at Aviva Investors, acknowledged it was likely that the supply of goods and services would initially fail to keep up with demand, hence inflation.
Others are more sanguine.
Accountancy firm KPMG forecast: “Inflation is set to remain low throughout 2021 as the economy gradually recovers to a new normal. The headline rate is expected to stay below the Bank of England’s two per cent target.”
Focus Economics comments: “Inflation is seen rising closer to the Bank’s target due to a combination of higher energy prices, economic recovery, the expiration of last year’s temporary VAT cut, and supply-chain pressure linked to Brexit.”
It expects inflation to average 1.5 per cent in 2021, and 1.9 per cent in 2022.
Inflation in the longer term?
Pundits point to the UK and Europe’s ageing populations leading to a greater proportion of the wealth in the economy remaining with those least inclined to spend it; the pandemic’s acceleration of the pace of technological change within society such as online shopping; and high debt levels restricting how much can be spent on goods and services.
All would tend to hold inflation low.
Mike Coop, multi-asset portfolio manager at Morningstar, believes inflation would have to reach a level above three per cent before it would likely have a very material impact on portfolios.
Speaking to FT Adviser, he suggested inflation would remain within the 1-3 per cent range for the foreseeable future.
However, the risks of inflation negatively impacting portfolios over the next five years had risen, and so it was prudent for them to be adjusted to reflect this, an assessment with which I would agree.