Inflation remains at the forefront of investors’ minds, with already rising price pressures recently receiving a further boost from soaring commodity markets.
First quarter financial results for most public companies will soon be released and the impact of rampant inflation will no doubt be closely scrutinised.
Equities traditionally continue to perform relatively well during bouts of inflation, largely thanks to their ability as a “real” asset class to pass higher input costs on to consumers, meaning company revenues, earnings and dividends also rise. Historically, equities offer the largest real returns in modest inflationary environments but start to underperform gold, commodities and real estate if inflation runs above 5%, according to 150 years of US data. Still, even when inflation is running hot and above 5%, real equity returns have still been positive during this time period.
Inflation metrics are currently at their highest level in a generation, with the consumer price index in the United States rising to a 40-year peak of 8.5%, year-on-year, and the Eurozone equivalent coming in at 7.5%, its highest level on record. Though the corresponding UK figure of 7.0% is slightly lower, it still represents a 30-year high and, along with the US and Eurozone data, is significantly above the 2% central bank target. Though there has been 12 consecutive months of US CPI Y/Y releases above the Fed’s 2% inflation target, it is only the last four months that the core reading for this measure has exceeded 5%.
Unsurprisingly, this has ramped up the pressure on central banks to rein in inflation via monetary policy tightening. In March, the Federal Reserve delivered its first rate hike since December 2018 and the Bank of England raised the base rate for the third time in four months. Though the European Central Bank is yet to embark on lift off, recent rhetoric has been increasingly hawkish and received as clearly signalling movement in the same direction.
