The inflation story keeps getting worse. UK’s consumer prices rose to a huge 3% in August compared to the same month last year. This is also a 0.9 percentage points increase from July’s inflation levels of 2.1%, the highest on record since the current price index was started in 2006.
The red flags were already there, when inflation first increased above the Bank of England’s comfort level of 2%. And now this has happened too. It can be particularly worrying when seen in conjunction with growth numbers. In July, the UK’s growth almost stalled from the month before. This is despite the fact that all restrictions were lifted during the month.
It’s not just inflation, it may be stagflation
High inflation and low growth, if continued, can be a policy maker’s nightmare. Stagflation, as the phenomenon is called, limits policy options available to stabilise the economy again. If interest rates are increased to control inflation, then growth suffers even more. And if government spending is increased to stimulate growth, inflation can rise even further. Finding the right balance may not always be easy.
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In the meantime, if there is no growth, it means people’s incomes cannot rise either. And at the same time, buying power declines fast because of rising inflation. This can further reduce demand for goods and services, dragging the economy back even more. Needless to say, this is bad news for the stock markets too.
Why I am not selling
But as scary as it appears, I do not think now is the time to sell. There are three reasons for this. The first is that so far we have very few data points to work with. As far as inflation goes, it is widely understood to be transitory. In fact, the Office of National Statistics (ONS), which publishes the inflation number, says in its release from earlier today that the large increase from last month is a base effect. Last year in August, the ‘eat out to help out’ scheme was underway, which allowed eateries to charge lower prices for food. In comparison, this year’s prices look artificially higher as a result.
Other increases, like that in transport can also be seen as post-lockdown adjustments. Fuel prices have risen this year and so has demand for used cars. As we are now allowed to travel, air fares have also contributed to inflation. How long these increases continue remains to be seen. As supply catches up with demand, prices could fall again.
Also, as far as growth goes, these are only a single month’s numbers. Quarterly growth figures showed an impressive 22% increase for the UK economy from the year before in the April-June quarter. Given the uncertainty attached with the latest numbers at this time, as the ONS points out, I would not react too much to monthly numbers.
Investing in the right stocks
Further, some of the biggest stocks listed on the London Stock Exchange are multi-nationals. This means that the potential for stagflation so far applies only to UK-centric companies. Global growth is actually expected to be at 6% this year. And at least some of them, like miners and oil companies, are actually a good hedge against inflation. If anything, for me, it is a time to buy.
