Data for June is due from the UK and US and officials from both the Bank of England and the Federal Reserve have recently indicated inflation could run higher than they initially expected as the pandemic recovery gathers pace.
Although AJ Bell investment director Russ Mould said neither is showing any indication of rushing to raise interest rates or throttle back on quantitative easing, figures from the US on Tuesday and UK on Wednesday “will be the next test of central bank policy”.
UK inflation jumped to 2.1 per cent in May, overshooting the Bank of England’s target for the first time in two years and raising fears that the easing of pandemic restrictions since March will lead to a sustained rise in the cost of living. A jump in the price of fuel was one of the main drivers of May’s increase.
The last US numbers showed consumer price inflation was running at 5 per cent.
Mould believes sustained increases in inflation would not just have implications for the value of consumers’ money – as purchasing power will go down and the cost of living will rise – but their investment portfolios too.
Although inflation has been largely dormant for almost 40 years he said “its return would represent a major game-changer for investment portfolios”.
“If inflation goes up and stays up, everything that has worked from an investment perspective for the last 40 years – bonds, secular growth stocks and paper assets – may stop working,” he warned.
“What has been out of favour for 40 years – real assets, value and cyclical stocks, even gold – may come back into their own.”
Mould said rising inflation could also impact on demand for different types of stocks.
“If inflation goes up, investors may prefer companies that have pricing power through strong brands, market share, a technological edge or captive customer base over those that promise growth in the future but are losing money now as they are involved in a land-grab for customers,” he said.
“Some strategists are asking the question as to whether a rise in inflation could represent a generational tipping point and why believers in the ‘inflation’ narrative will not be put off by the recent reversal of the “value” trade.”
He said “value” investing has outperformed for the last six to 12 months, but “growth” investing had outperformed for more than a decade before that.
The rise in UK inflation seen in May was also down to increases in the cost of clothing, meals and pub and restaurant drinks. Online sales of computer games and music downloads were also cited in the Office for National Statistics figures.
The US figures come on the back on the Federal Reserve’s forecast at June’s policy meeting of two, quarter-point rates hikes by the end of 2023, up from an all-time low of 0.25 per cent.