Steve Windsor is featured in Morningstar discussing how this morning’s UK inflation numbers remain elevated, and the market is now predicting that inflation will remain high throughout 2023.
“‘We will likely start to see the energy price component of the inflation basket begin to normalise over the coming months, particularly as we get through the anniversary of the start of the war in Ukraine in February.”
He notes it’s important to remember that inflation is a year-on-year measure, and so the base effect of higher inputs disappears over a 12-month period. We will likely start to see the energy price component of the inflation basket begin to normalise over the coming months, particularly as we get through the anniversary of the start of the war in Ukraine in February. However, higher interest rates are now driving higher inflation as they feed through to an increase in mortgage costs. The mortgage effect is set to become more material as many fixed-rate mortgage periods roll.
The worsening cost-of-living crisis and the potential ensuing deep UK recession should at least mean that the high-rate environment is short lived. The Bank of England could well be cutting rates just as quickly as it raised them once inflation normalises towards the back end of 2023.
Investment wise, companies that have relied on cheap equity to fund a lack of near-term profit are likely to struggle in the current climate. Cheap equity funding is no longer available and that whole business model now feels very dated! Likewise, companies that have a high percentage of floating rate debt face significant challenges as most will now have cashflow dilemmas. And finally, in light of the worsening cost-of-living crisis, safe haven investments are only really likely to be found in non-discretionary spend sectors.
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