Rising – and potentially long-lasting – inflation has continued to dominate the headlines across developed economies, including in the UK[i]. Meanwhile, the Bank of England has warned that rising inflation could trigger a sell-off in global financial markets, with damaging consequences for the UK economy[ii]. All these combinations of factors have accelerated investors’ search for yield, to diversify their stock market positions and also to protect against feared inflation.
Chart of the month: Inflation jumped to 3.2% in August 2021
Source: Office for National Statistics (ONS), BBC, Blend Network
Politics & Economics
- Petrol queues, food shortage and 1.5 million cauliflowers left unpicked to rot. Those have been the types of headlines dominating in the UK over the past month or so[iii]. Although members of the armed forces have been drafted to help tackle the supply chain crisis by driving lorries, the issue appears far from being solved in the near-term[iv].
- ‘Levelling up’, the term first used by Prime Minister Boris Johnson in 2019, reappeared at the Conservative Party conference earlier this month[v]. In his speech, Mr Johnson focused on ‘levelling up’ the country to close the gap between the rich parts of Britain, mainly London and the south-east, and the rest of it, chiefly northern constituencies[vi].
- Rising energy prices caused inflation pressures in the EU. The EU’s September inflation rose to 3.4%, the highest level in 13 years. Germany CPI rose by 4.1%, a 29-year high[vii].
- In the UK, the Bank of England expects inflation will rise above 4% this winter, the highest level seen in a decade, and will remain elevated until at least the summer of 2022 before gradually falling back towards the bank’s target rate of 2%. However, some analysts have warned inflation could increase at a higher level within months[viii].
- According to the Nationwide House Price Index , annual house price growth remained in double digits for the fifth month in a row in September but eased back to 10.0% from 11.0% in August[ix]. Despite ongoing double-digit growth, momentum has eased since the start of summer, though prices remain c13% higher than before Covid began.
- Wales, Scotland and Northern Ireland were the strongest performing regions in Q3, while London was the weakest. Price growth in most English regions saw a slowdown in Q3, and performance in the north continued to exceed that in southern England[x].
- The energy shortage rattled other financial markets too, as investors worried about the fallout. US and Europe government bond yields climbed, and UK yields on ten-year gilts jumped to their highest since May 2019[xi]. Markets are down led by energy stocks[xii].
- Earlier this month, the Bank of England warned that rising inflation could trigger a sell-off in global financial markets, with damaging consequences for the UK economy[xiii].
FX & Commodities
- October was another roller-coaster month for energy prices. After OPEC resisted calls to increase output, crude price surpassed $80 per barrel and reached the highest level in three years. OPEC said it will stick to a steady output increase agreed this summer[xiv].
- In Europe, natural gas price jumped by over 60% in two days. But prices soon reversed when Vladimir Putin hinted that Russia could supply additional gas to Europe[xv].
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[i] Source: https://bit.ly/3lmmLz6
[ii] Source: https://bit.ly/2WRZTOr
[iii] Source: https://bit.ly/2Ytu2ok
[iv] Source: https://econ.st/3uTHnBN
[v] Source: https://econ.st/3iI3nuJ
[vi] Source: https://bit.ly/3iK6fHl
[vii] Source: https://bit.ly/3BfnoQx
[viii] Source: https://bit.ly/3BfnoQx
[ix] Source: https://econ.st/3iI3nuJ
[x] Source: https://on.ft.com/2YvA5bi
[xi] Source: https://bit.ly/3iK6fHl
[xii] Source: https://econ.st/3iI3nuJ
[xiii] Source: https://econ.st/3iI3nuJ
[xiv] Source: https://on.ft.com/3AoFoqj
[xv] Source: https://bit.ly/3ahILoj