It remains difficult to get away from the subject of inflation, such a dominant theme has it become in the past year. That there is a ‘cost-of-living crisis’ across most of the western world, with all its knock-on political effects, is obvious. Nominally independent central banks (‘nominally’ to the extent they are directly responsible for monetary policy and setting interest rates) are embroiled in the politics too, like it or not. Jay Powell bidding for a second term as Chairman of the US Federal Reserve last year (a presidential appointment but one which needs Senate ratification) had it spelled out to him that his successful reappointment would be conditional on getting inflation back under control, specifically containing the effect of escalating food and fuel prices on US household incomes. Here in the UK, the terms of reference of the Bank of England’s mandate have become a political football in the leadership race for the Conservative Party, with Liz Truss taking deliberate pot-shots at the shortcomings of the Bank, the Governor and the Monetary Policy Committee.

 

With all the recent volatility in bond markets as investors and economic soothsayers poke the chickens’ entrails of any data from which to extrapolate future trends, a slew of inflation data this week offered mixed signals. In the US, July’s annual inflation rate of 8.5% retreated from the June peak of 9.1%. US producer price inflation was also lower than expected. Swedish inflation data published today also saw a modest weakening, 8.5% in July down from 8.7% in June. On the other hand, for those whose narrative is that it is not all over yet, Eurozone inflation in July went the other way, up to 8.9% from 8.6% in June.

 

The published data is inherently rearward looking. It offers an important reference point as the most recent sense-check but if not old hat, the data is already historic. As we discussed a few weeks ago, since March most ‘hard’ commodity prices (copper, steel, iron ore etc) had been weakening. More recently, in May, ‘soft’ commodity prices (wheat, corn, soya) had been coming off the boil also. It takes time for the effect to percolate through the system towards consumer selling prices but some of that was evident in the data above. Crude oil prices too had been markedly softer after the peak in the aftermath of the invasion of Ukraine. However, the price charts of most of these commodities, including oil, have stabilised recently, indeed some have started to turn upwards again. 

A lack of water blights European transport  

Where there are supply chain disruption issues still in evidence (and one of the most pervasive remains a global shortage of semi-conductors affecting everything from the manufacture of cars and white goods, all the way through to the navigation and control systems for Putin’s cruise missiles and ‘smart’ ordnance), the position in western Europe is further complicated. In Germany’s industrial heartland in the Ruhr, the acute shortage of rainfall anywhere in the Rhine catchment area has caused river levels to fall so low that the navigable length of the Rhine from upstream in Switzerland has been foreshortened causing significant disruption. The Rhine is western Europe’s major industrial artery, carrying 300m tonnes of goods a year, 80% of all Germany and Switzerland’s river-borne materials, for processing along its path, or to be exported from the major Dutch North Sea ports. Finding alternative means of transport, whether road or rail, and already capacity constrained, keeps upward pressure on transport prices.  

Energy costs: it is the winter that counts   

Then, of course, there is the thorny subject of energy, and specifically gas and the broader ramifications of its being exploited by Putin. In the UK, the Governor of the Bank of England is currently forecasting inflation peaking at 13% later this year, that peak largely driven by the peculiar mechanism that is the energy price ‘cap’ (the cap which is preternaturally disposed to being lifted to consumers). The extent to which Putin literally turns the screws creating shortages of fuel and rationing of energy will have a marked effect both on future price pressures, as well as economic activity. Basking in yet another mini-heat wave in mid-August, it seems difficult to contemplate but while in some regions there is welcome relief from what had seemed to be inexorable upward pressure on inflation, it is likely to be the winter months which will determine the duration of the inflationary problem.

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions. 

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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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