Inflation is still concern for investors
Aug 20 2008 by Andrew Miller, The Journal
DESPITE hopes that slower economic growth would lead to reduced price pressures in the world’s major economies, inflation remains a significant concern for investors.
US consumer price index data for July came in above market expect- ations, with the series rising by 5.6% year on year, the highest reading since 1991. Perhaps of more concern was that core inflation (which excludes volatile food and energy prices) continues to rise, with the year-on-year rate now at 2.5%.
Clearly, these numbers will not be welcomed by the Federal Reserve but we do not believe that the data will influence US monetary policy in the near term, with rates likely to stay at 2% for the remainder of the year.
In the UK, inflation data showed that prices surged 4.4% year on year to July, up from 3.8% the previous month and significantly ahead of forecasts.
Meanwhile, unemployment data showed the claimant count rising at its fastest rate since 1992, and the unemployment rate climbing to 5.4%.
Following these numbers, attent- ion quickly shifted to the Bank of England’s quarterly Inflation Report, which the markets expected to be focused on the need for inflation vigilance. However, while the Bank acknowledged that inflation could breach 5% in the near-term, it also indicated that the continuing slowdown in the UK economy is likely to see price pressure ease. Thus, the Bank seems to have opened the door to start cutting interest rates, possibly as early as the November meeting ahead of the next Inflation Report.
There was at least positive news on inflation from China. The Chinese consumer price index fell to 6.3% year on year in July as food price inflation continued to slow, and the other components of the index saw little upward pressure.
So after a fairly negative week in terms of economic news flow, where does this leave us in terms of markets? Equities have been performing relatively well over recent weeks. The main concern about the outlook for markets in the near-term is how the deteriorating economic backdrop feeds through into earnings estimates.
We have argued for some time and still believe that equity markets are attractively valued relative to bonds, but they continue to suffer from a lack of positive sentiment. It is likely that earnings growth forecasts will be pared back over the coming weeks from what seem to be fairly optimistic levels. Thus, equities are likely to have a volatile ride as forecasts are trimmed.
Andrew Miller is regional office head of Barclays Wealth
