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Investment guide

Will inflation settle soon?

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Overview

Interest rates continue to rise on both sides of the Atlantic as inflation keeps climbing, and that’s making investment markets a bit unpredictable at the moment.

But we’re seeing signs that inflation could be peaking in the US and may start to settle. This matters because America is the world’s biggest and most influential economy, and is therefore extremely important to global investments like those behind the NatWest Invest funds.

The US economy is actually holding up pretty well. The country’s employment market, for example, is in rude health, with over 400,000 jobs added each month so far this year. 

An extremely rare situation

Market conditions are highly unusual right now because we have rising inflation alongside slowing economic growth. Usually, higher inflation accompanies a strengthening economy – people have more money to spend, they spend it, and prices go up.

But we’re still seeing the consequences of the coronavirus pandemic filter through the economy – people finding themselves with some extra money after lockdown just as suppliers struggle to meet demand.

This is pushing up prices, which means central banks like the UK’s Bank of England (BoE) are removing their support for economies to tame inflation, just as those economies are slowing. 

What are the signs of inflation peaking?

The most recent consumer price index (CPI) figures for the US came out earlier this month, and they showed a slight drop. Year-on-year headline inflation was down to 8.3% from 8.5% in March. A small fall, but one that suggests US inflation might be reaching its ceiling.

The CPI numbers also showed that wage growth in the US was cooling and goods shortages were easing, which could relieve some of the pressure on America’s central bank, the US Federal Reserve (Fed), to tackle inflation.

The Fed itself also suggested that price pressures could be reaching their limit when it last announced an interest rate rise.

Managing your money

The experts at Coutts had already made a number of changes to the NatWest Invest funds to ensure they were ready for the potential challenges this year could bring. These include:

  • Reducing European equities at the end of 2021 in anticipation of a tougher economic outlook for Europe.
  • Buying more UK stocks, which have outperformed global equities so far this year.
  • Holding fewer bonds that are sensitive to rate changes, which has helped cushion the funds somewhat from bond market falls.

 

What’s been worrying investors?

On 6th May, the BoE raised interest rates for the third time this year by another 0.25% to 1%. Similarly, across the pond, the Fed raised its interest rate by 0.5% to a range of 0.75% to 1%.

At the same time, the BoE warned that the UK economy could shrink rather than grow in the last three months of 2022, and could contract next year. But any discussions surrounding a shrinking UK economy are very speculative and not at all certain at this stage.

It’s certainly true that markets are facing some very real challenges right now, but the signs of inflation peaking, solid company performance and no indication of a US recession are all positives worth keeping in mind. 

Learn more about investments

Whether you’re an experienced investor or just finding out what investing is, we’ve got a range of articles to help you understand more about investing.

We regularly update our articles depending on what’s happening in the market so check back for future updates.

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