Inflation: How worried should you be?
With data showing UK inflation now running at 2.5%, the highest since August 2018, and US consumer prices rising at 5.4%, the most since the Global Financial Crisis, the debate over whether and how to rein in rising prices is reaching fever pitch.
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Compounding these worries is the latest Official figures released yesterday that reveal a booming jobs market in the UK, with mounting inflationary pressure from rising wages. Average weekly earnings in the three months to the end of May rose by 7.3%, the most since records began.
Two Bank of England officials have in recent days suggested they may vote to dial down stimulus earlier than the Bank has been signalling following this sharp rise in inflation. A damning new report from the House of Lords said the BOE has demonstrated an "addiction" to quantitative easing and likened its strategy "to playing a round of golf with only one club. They reach for it whatever the economic problem."
Will Matthews, Partner at Knight Frank’s capital markets research team, highlights the current approach in Europe to manage inflation and rising costs, in his leading indicators report earlier this week. The European Central Bank has raised its inflation target to 2%, previously below but close to 2%, reducing pressure on it to hike interest rates. It currently expects inflation to reach 1.9% for the Eurozone during 2021.
The unexpectedly sharp inflation rise in June challenges the view that high inflation during the post-Covid recovery will be temporary.
However, David Bailin, chief investment officer at Citi Global Wealth, believes there is no need to panic about the US inflation surge, he says: “The data that we are seeing right now, while highly unusual, I would argue is the temporary kind, in other words the beginning of a recovery kind of inflation.”
David continues: “The fed are creating enormous liquidity in the market place, they are really in a growth mode because of the fact that they are worried about the nature of this pandemic and the ability to get back to full employment.”
David Bailin and Flora Harley, Knight Frank's global wealth and economics specialist, discuss the subject of inflation on property markets and whether it should be a major concern to investors, on the Intelligence Talks podcast. Listen to the podcast here, or wherever you get your podcasts.