November 19 2021
Inflation was again in the limelight this week, this time in the UK. Tuesday saw the release of average earnings data. Including bonuses the figure was 5.8% for September, below the forecast of 6.2%. Excluding bonuses meanwhile the figure came out at 4.9%, again behind the consensus forecast, of 5.1%. This will have pleased the governor of the Bank of England and perhaps afforded them a little bit of grace with regard to pressure to raise interest rates.
That respite lasted only a day however, with CPI posting a lofty 4.2% year on year figure to the end of October. This was much higher than the forecast 3.7%. Even core inflation, which ignores the more volatile food and energy, came in at 3.4%. Both figures were therefore well above the 2% target set for the Bank of England. The central bank have been very open that they expect inflation to be higher, potentially between 5 and 6% at its peak, before retracing back. Whilst they will be nervous to put interest rates up in fear of slowing down the recovery, they must also be aware that too high inflation can curtail spending, particularly on discretionary goods, as they have less free cash flow available. This could therefore dampen retail sales, especially the volume of goods and services sold, rather than their value.
Sticking with inflation again for the moment, an analysis provided by Pictet provides a useful breakdown of the current US inflation and its key drivers. Covid sensitive areas continue to be a significant contributor to the current level being seen. What is interesting however is that this appears to have peaked mid-year. Base effects has been on the rise more recently but inflation excluding these two categories is becoming a larger contributor. This will be something we feel the Federal Reserve will be watching closely as it is this element which can have a marked impact on their current thesis that the higher level of inflation being seen will prove transitory.
As we know, a little bit of inflation is a good thing, as it helps to encourage people to spend, in fear that things will cost more tomorrow than they do today. Too much however can have an adverse effect, act lack a tax and slow down spending. With regard to asset markets, too much inflation for bonds (without inflation protection) is a bad thing as they are a nominal asset. Equities, as a real asset, typically do well, as long as long as companies are able to pass on higher input prices, and wage costs, to the end purchaser. For those who can’t however, this eats into profit margins. For now, the research shown above suggests that negative real bond yields on government bonds is a positive for equities, but how high and for how long remains key.
Sticking with equities, Janus Henderson have released their Global Dividend Index to the 30 September. Given the bumper third quarter which was seen they now forecast dividends to jump 15.6% this year to a total of $1.46trn. This will exceed the pre-pandemic record set in the 12 months to March 2020. This will restore their long term growth rate back to the 5-6% trend. They are yet to announce their forecast for 2022 but believe that whilst miners will struggle to maintain this year’s rate of payments, this slack could be picked up by the ongoing restoration of banking dividends. Good news for income investors all the same.
Finally we report unfortunately on reported COVID infections. Whilst the vaccination programs which have been put in place will hopefully mean that we don’t see a sharp rise in deaths, this apparent 4th wave does look like it will lead to lockdowns, either partial or full, as we are now seeing across Europe. This inevitably will have some impact on the economic growth outlook, the scale of which is yet to be seen.
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