If you listen to the doomsters forecasting ever higher UK inflation and energy costs, you could be forgiven for anticipating the end of the world as we know it any moment now. Every few days another research outfit predicts ever more scary figures – last week it was something called Cornwall Insight (oddly, from Norwich) making a name for itself with grave predictions for the energy price cap. This week Citigroup has thrown its considerable sized hat into the ring with dire warnings of inflation above 18%. Once a bandwagon starts rolling no end of soothsayers want to board it. Perhaps a little circumspection is warranted however.
If everything carries on as it has been then perhaps, yes, we might see inflation in the high teens but economics, like life, does not happen like that. Things change. Habits change, responding to the shifting economic background. Growth slows and, perhaps, even slips into decline, taking the heat out of price rises. The media trumpeted loudly as the oil price hit new highs every other day but its decline by 20% from its peak level has been met by silence. Similarly, the fall-back in the price of petrol is not sufficiently newsworthy to justify any meaningful press coverage. A non-driver could be forgiven for not realising it had occurred. It will, however, be having a negative impact on the cost of moving goods and materials and that will ultimately apply downward pressure on their prices. The start of the latest rise in the oil price began in December last year with the major surge occurring from February this year. Early 2023 will, therefore, start to see its impact drop out of the annual inflation figures, followed by those items most rapidly effected by the oil price.
On the employment front the headlines are given to those newsworthy groups with the muscle to strike. What we don’t read about are the bars and restaurants with lower customer numbers and higher input costs, addressing the problem by either reducing employee numbers or their working hours. Similar tales abound across many other parts of the economy making wholesale wage inflation a little less likely.
Energy will, of course, remain a problem for the foreseeable future. Governments pandering to eco pressures have led many to pursue almost negligent strategies when it comes to energy security. Now that Russia has lit a fuse under the gas delivery infrastructure those shortcomings are clear for all to see. The unwinding of some of those green policies will ultimately help stabilise things but short-term pressures will remain for a while yet. The fixes will take time whereas the problem is now. This in itself will force the demise of financially weaker businesses, adding to the employment problems above.
Of course, a major escalation of Putin’s assault on Ukraine could exacerbate all the above problems but the latter’s resilience and self-belief look like forcing a protracted stand-off. That being the case, it looks to me as if we will be looking through peak inflation over the autumn months. I would wager we will not see 18% plus inflation but we will be in for a few worrying months yet.
Market Outlook
In the face of the above markets have been fairly resilient. The FTSE 100 is not a good bellwether as it is half full of resource stocks and banks, both of which will be doing well out of the current scenario. However, we have seen big recoveries in the Dow Jones and NASDAQ indices as well as the FTSE All Share index. Our domestic market is full of financially strong companies buying in their own stock everyday as they throw off cash they can put to no better use. This whilst their stocks become even cheaper in US dollar terms with the pound only around 1.185 to the dollar. Expect those US predators to continue targeting our market.
It is hard to get too carried away with the market recovery just yet and trading in a narrow range is likely for a while. However, if the above inflation theory proves correct, better news on that front could spur further stock market recovery through the winter, ironically the time everyone is currently worrying about with regard to energy costs. As Greavsie used to say – it’s a funny ol’ game Saint!
Russell Dobbs FCSI
Chartered Wealth Manager
