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17 May 2021

COVID Recovery Sparks US Inflation Concerns

After the US reported higher-than-expected consumer price index (CPI) inflation for the month of April earlier this month, global indices endured a market-wide sell-off over concerns that consumer price increases could become uncontrollable and lead to an interest rate hike.

US inflation rose 4.2% year-on-year (YoY), while core prices excluding the more volatile energy and food sectors rose 0.9%, the steepest climb since 1981. At first glance the figures raise cause for concern but, when broken down, the rise is not as drastic as first perceived. Firstly, the pandemic’s impact this time last year caused a significant decline in general prices and economic activity, therefore the base point that inflation is measured from is considerably lower and distorts the figure. Taking a closer look at the drivers of inflation, supply chain bottlenecks are pressuring the price of goods while the fast-paced economic recovery is also causing increases for transportation and travel such as; hotel prices (+8.8%), airplane tickets (+10.2%) and used car prices (+10%). Inflation for housing and services was less extreme and in-line with increases over time, with shelter costs increasing 0.4% in April while services excluding energy rose 0.5%. The Federal Reserve has repeatedly reassured investors that the recent and future inflation increases will mainly be due to temporary factors. However, the market appears to believe otherwise, and the higher-than-expected inflation data highlights the unpredictable environment we are currently in.

Many growth stocks in the Nasdaq and S&P 500 have smashed earnings out of the park over the past few weeks, as much of their earnings expectations are in the future. These inflation readings erode the current value of their future earnings, hence investors’ concerns at the numbers. US equities attempted a recovery last Thursday, however, the S&P 500 was down 2.71% while the tech-heavy Nasdaq dropped 3.97% for the week.

The data appeared to have a knock-on effect to the other major indices. The UK’s leading 100 stock index, as measured by Cboe, declined as low as -4.24% but showed some strength to finish the week down 2.3%. Looking at the EuroStoxx index, it followed a similar path, falling 4.41% then recovering to roughly -1.49% for the week. Chinese equities remained unaffected from the US data with the broader CSI 300 up 0.07%, yet Hong-Kong’s Hang Seng index slipped 3.59%. The Nikkei 225 also dropped 4.44% on the week.

One of the UK’s largest supermarkets and Yorkshire’s very own Morrisons was in the news last week, stating the pandemic has led to the “renaissance of the supermarket.” The supermarket’s sales increased by 2.7% in the 14 weeks to May, with online sales figures more than double those of the same period last year. As we return to normality, Morrisons seems well-positioned despite a £27m bill for COVID-related costs in the last quarter. Its food-to-go, take-away counters and salad bars have begun to pick up, while the supermarket’s popular cafés are expected to reopen their doors soon.

Morrisons is also encouraging British entrepreneurs to apply to their Growing British Brands Scheme. The scheme will give successful applicants the chance to sell their products in all 497, Morrisons stores as well as listings in other parts of the business, including Morrisons.com, Food Boxes and wholesale channels like Amazon. Morrisons have built a team of experts to help find brands with innovative products and support emerging UK businesses, successful applicants to the programme will receive advice and support covering every aspect of retailing, from production to packaging and marketing and logistics. CEO David Potts encouraged the introduction of the scheme, stating: “For too long, small businesses have lacked the opportunity and perhaps confidence to scale up a great idea capable of supplying hundreds of stores at serious volumes. We hope that this programme can provide the support, guidance and confidence for great brands with great products to lift their horizons, to think big and to reach new customers all around Great Britain.”

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
COVID Recovery Sparks US Inflation Concerns
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