Last week revealed that the annual rate of consumer price inflation in the UK had jumped to 3.2% in August. The level marks the highest monthly jump in inflation in nine years, and is also far above the Bank of England’s 2% target.
There are two main reasons why investors are focused on inflation. The first is that inflation erodes the value of savings over time. The second is that, if its rise is sustained, a period of higher inflation is likely to cause governments and central banks to change their policies in response. These policies (such as low interest rates) have supported asset prices since the pandemic took hold last year.
Markets are now weighing up what the Bank of England is likely to do in this environment. John Higgins, Chief Markets Economist at Capital Economics, believes that inflation may increase as the year progresses
“In the UK, the jump in consumer price inflation from 2% in July to 3.2% in August is probably the first step in a rise that may take inflation to around 4.5% by November,” he wrote. However, he also suggests that August’s jump is largely down to ‘base effects’ – the fact that inflation statistics are often based on the same month one year ago, so can appear large in comparison when affected by extraordinary events like the pandemic.
“While most of the rise [in August] was due to base effects, there were some signs that underlying price pressures are strengthening. We expect inflation to fall sharply next year as base effects fade, which underpins our forecast for the Bank of England to hold off raising [interest] rates until mid-2023.” US markets were similarly gripped by the prospect of rising inflation last week, falling to their lowest point so far this month. The S&P 500 index fell around 0.9% on Friday, while the more tech-heavy Nasdaq Index fell the same amount. The Federal Reserve (the US central bank) is set to meet this week, and is expected to offer clues about the timings around when it will begin reducing its bond-buying programme (which has supported markets during the pandemic).
Of course, a period of rising inflation is just one of the challenges that can be met with a long-term investing mindset and a well-diversified portfolio. See the video for below on how investors can approach inflation in retirement.
Finally, Asian markets were focused on the story of Evergrande last week. The major Chinese property developer, which is listed in Hong Kong, has seen its share price drop heavily since it revealed that it was at risk of default last month. With large debt repayments looming, its future is in doubt.
The event has already prompted some wider market wobbles, and is likely to have some further fallout, points out Martin Hennecke, Asia Investments Director at St. James’s Place.
“Given the size of China Evergrande and its debt pile, it is only natural if not inevitable to witness a degree of contagion, and indeed we have already seen this for example in the average yield on Chinese junk bonds having risen to an 11 year high, while property prices appear to be cooling against the backdrop of concern about inventory coming onto the market at discounts.”
“There has been much speculation about how deep contagion may go, however, and ultimately that is likely to depend on any actions being taken (or not taken) by the central government, which is difficult to predict at this stage, as it seeks to balance the campaign of moral hazard reduction with social and financial stability.”
However, Hennecke also points out that China’s banking sector is in good health relative to global standards, which should give investors some confidence that the country has the resources to support the economy from any wider fallout.
He adds: “On a macro-level, China’s fiscal position and financial reserves are strong, in part since COVID-19 related stimulus have not been forthcoming nearly as generously as in most Western countries, all of which suggests that financial resources to deal with potential fallouts of significance are hand, if and when it should be decided to use them.”
While rising inflation is certainly something to think about in retirement, the truth is that there are plenty of factors to consider. Last week, for Pensions Awareness Week, we brought together lots of information that you need to know in order to successfully plan for your financial goals in this phase of your life.
It used to be that reaching retirement would be the end of the pension saving and investing journey. These days, however, it merely signals a new phase, as your plans are shaped around new priorities.
With various pension choices to make at retirement, it’s vital to have a good idea of what retirement means to you in order to put a plan together.
It can be an emotive subject – it might be both the start of something new and the source of great worry and uncertainty – and investment decisions made at this point can weigh heavily. Understanding how your emotions influence those decisions is important.
There will be practical questions to ask, too, such as whether to access your pension when you retire or keep it invested during retirement.
Whether you’re just starting to save for retirement, want to make sure your retirement plans stay on track or you’re managing your retirement income, your St. James’s Place Partner can help you make your retirement dream a reality.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
Inflation can be doubly damaging in retirement, because it can reduce the value of your capital as well as the purchasing power of your income. Your St. James’s Place Partner can use their knowledge and expertise to develop an investment strategy that will help mitigate the impact of rising prices on capital value, while providing an income that grows with inflation over time.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Freedom is the very essence of our economy and society. Without freedom the human mind is prevented from unleashing its creative force. But what is also clear is that this freedom does not stand alone. It is freedom in responsibility and freedom to exercise responsibility.
German Chancellor Angela Merkel, who will step down from the role after 16 years following this weekend’s election in Germany
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