Inflation and Recession… A view from Mark Reidford

Mark Reidford, founder of Innes Reid provides his thoughts on what we can potentially expect from inflation and how to react should the UK enter a recession.

Inflation pressures

In terms of inflation, 2022 is not panning out as many would have thought when contemplating the year ahead on the 1st January. Our view back then was that inflation would likely have peaked in April or May. However, Russia’s invasion of Ukraine in late February stoked inflationary pressures by driving both a sharp rise in energy prices and causing further supply chain disruption and food price inflation.

“UK inflation to hit 13% in the next couple of months.”

The Office for National Statistics (ONS) reported this week that Consumer Price Inflation (CPI) rose to 10.1% in the 12 months to July, its highest since February 1982, up from an annual rate of 9.4% in June. The Bank of England says it is expecting UK inflation to hit 13% in the next couple of months. I think we can say with almost certainty that nobody had this baked into their forecasts for the year ahead just eight months ago..

Short-term economic forecasting is, to put it mildly, fraught with danger. As the old joke goes, economists have predicted nine of the last five recessions, and with the world seemingly getting ever more complex and interwoven, it feels like the chances of getting short-term predictions right keep diminishing.

Understandably the inflationary pressures have created more uncertainty over the trajectory for global growth with the trend being to forecast lower growth and higher inflation for longer.

Falling into a recession

In recent weeks it has become apparent markets are struggling to decide whether to worry more about inflation or recession; and the balance would appear to have swung firmly in favour of recession. We have seen most asset classes reflect it: the price of commodities including gold, metals, oil and agriculture have all fallen, bond markets have been volatile and moved in a way suggesting recession is imminent, and whilst stock markets have been performing satisfactorily of late, fears of recession are prevalent.

Since the Industrial Revolution, economic growth has been the rule in most countries, and contractions a recurring exception to that rule. Recessions are the relatively brief corrective phase of the business cycle; they often address the economic imbalances engendered by the preceding expansion, clearing the way for growth to resume.

It is hard to see how the combination of falling real incomes, very poor business and consumer sentiment, supply disruptions, tighter and high energy prices won’t eventually see the UK falling into recession. What’s more, it may be the case that a recession is necessary to rid the UK of its underlying inflation pressure.

“Investors have endured one of the worst starts to a year.”

It must be noted investors have endured one of the worst starts to a year, with the first five months of 2022 ranking as the sixth worst performance for equities since 1928. However,  challenges and volatility are an ongoing part of the investment process and, as always, we continue to focus on the long-term goals.

History tells us investors are much less likely to suffer losses when investments are held over longer periods of time, particularly for balanced portfolios. It’s therefore important to keep a long-term perspective and value The Importance Of Being Invested. 

We have to accept market volatility as part and parcel of investing. Instead, we should focus on the fact stock markets have mostly ended in positive territory, even in years marked by declines of more than 10%.

Diversification and spreading the risk

Finally, at Innes Reid our client portfolios are built not chasing trends but with diversification at the heart of everything we do thereby spreading risk across regions, asset classes and strategies.

In the last 10 calendar years, a portfolio investing in a combination of developed market and emerging market equities, investment grade and high yield bonds, property securities, commodities and hedge funds has delivered healthy returns with much less volatility than investing in equities alone.

The key point to remember in all this uncertainty is to think back to your long-term plan and remember when we deliver our advice we have planned for volatile markets and periods of disappointing returns.

• In the short term; inflation is very likely to stay high and interest rates will go up, economic growth will suffer and recession may be imminent.

CPI inflation projections peaking in 2022

• In the longer term; inflation will moderate, interest rates will come back down and economic growth will resume.

Market pricing reflects expectation of further rate increases

While we cannot control what inflation does or indeed influence unstable geopolitics, we can choose to stay rational, disciplined and focused on the plan. If your long-term goals have not changed since the start of the year, it is unlikely your plan will need to change either.

If you have any questions about the current uncertainty or you would like to review your Innes Reid portfolio, please do not hesitate to contact your adviser.

If you have not worked with us before, come and see us to learn more about how we do things. Book a complimentary meeting here or Call 01244 347 583 or email enquiries@innesreid.co.uk

This article is not personal advice. If you are unsure what is right for you, please seek personal financial advice.

Please note the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Source: FTSE, Bloomberg Barclays, FTSE, J.P. Morgan Economic Research, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management