Merlin Weekly Macro: Grappling with the cost-of-living crisis

Prefer audio? Listen to the recorded version below.

A few weeks ago, the Daily Telegraph prophesied that diesel would be “£2.30 a litre by Christmas”. Travelling the roads again this week, it’s not even the end of October and I see it’s already very nearly there, even if only on the motorways: a service station on the A1 in Cambridgeshire marked it at 222.9p. Even its unleaded was all but two quid a shot (199.9p a litre, to be precise). There may be others already higher.

Today, Brent crude is trading at $114/barrel and EU wholesale gas is €92/MWh; the former is close to double the price at the beginning of the year, the latter up by more than a three-and-a-half times multiple.

UK inflation is heading inexorably the wrong way. Reported at 3.5%¹ in September, up from an unexpectedly low figure of 2.3% in June, it is heading towards being double the central bank’s target of 2%. The Bank of England Monetary Policy Committee meets again, perhaps appropriately, on November 5^th to determine the next move in interest rates. Maintained stubbornly at 3.75% since December last year, and the only one of the major central banks so far not to have reacted to the inflationary pressure, it now finds real interest rates almost at zero after adjusting for inflation. If the Base Rate is left unchanged, it is almost certain that real rates (headline rate minus inflation) will once more go negative within weeks as the rate of inflation surpasses it. Good news for borrowers, less so for savers as corrosion eats away at the real value of money held on deposit.

As consumer prices accelerate again, divisions in the workforce are evident. Those in the public sector are benefiting from average annual wages still rising at 6.3% (i.e. a real increase of 2.8%). However, in the private sector nominal average wage growth is 3.0%²; real wages are already negative as inflation outstrips earnings. It cannot be a coincidence that retail sales have been weak for two consecutive months as consumers ponder the outlook, particularly if they are faced with the likelihood of higher mortgage costs or car financing rates or the borrowing rate on credit cards.

As the Chancellor dots the “I”s and crosses the “T”s on his budget statement, he too will have been making rapid readjustments to his assumptions as inflation bites and borrowing costs escalate. The economic think tank, the Institute for Fiscal Studies, reckons that inflation has gobbled up yet more of the supposed headroom that Rachel Reeves imagined she had bought for herself a year ago. Thanks to indexation in the benefits system, the IFS calculates that the welfare bill will cost £5.5bn extra in 2027 than was assumed previously. Easy come, easy go.

But whatever the official figures, there is always that uncomfortable feeling that reported inflation never matches real life experience. Inflation data is based on the rate of change of what is deemed a “representative basket of goods and services”. Of course, consumers’ economic circumstances vary enormously, which raises questions about what defines the economy of the “average” household.

In the US, a very unofficial price survey is conducted across the country’s 50 biggest cities. Its findings are instructive: in 2025, according to the Chapwood Index, no city experienced an average inflation rate of less than 9%, and only a handful were below 10%; most registered in the low teens but the range was 14.5% in Oakland, California at the highest down to 9.3% in Mesa, Arizona. The official US Core inflation rate was 2.6%. Whether the Chapwood number is accurate is not the point: it reflects public perception that the cost of living is a battle that government is failing to address. It is especially so when considering monetary policy the Federal Reserve focuses on “Core” inflation which removes short-term volatility created by food and fuel prices. This is despite cooking, eating, heating and driving being basic human needs. It reinforces the perception that economists and policymakers do not live in the real world. It becomes a great political challenge as Donald Trump is finding out, much to his discomfort, ahead of the mid-term elections having promised not just to address inflation but to “cut the cost of living”.

Closer to home, again it’s that distinction between the inflation rate and the change in nominal prices. The Office for National Statistics data shows that since the end of 2019 (i.e. before a toxic virus spread and Russia invaded Ukraine), reported average nominal UK prices have risen 36%. But many households filling up their cars or taking a delivery of heating oil will have a very different “lived experience” (as if there could be any other) from what the official data portrays.

We have an eventful fortnight in prospect. Given the urgency of the language expressed by the Office for Budget Responsibility about the need to repair the UK’s finances or face an inevitable fiscal crisis in the foreseeable future, John Healey’s first Budget needs to be a robust rebuttal of his predecessor’s expenditure plans. We wait to be surprised but are anticipating being disappointed. Following soon after, the US Mid-terms in which Trump is likely to suffer a severe rebuke at the hands of the electorate; having the measure of this most mercurial and bullish of presidents, one can be sure of fireworks to follow, both in terms of his reaction and the strong likelihood that if successful at the polls, the Democrats will petition impeachment.

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.   

Footnotes

¹Consumer price inflation, UK - Office for National Statistics

²Average weekly earnings in Great Britain - Office for National Statistics

Fund Risks

For a more detailed explanation of risk factors, please refer to the “Risk Factors” section of the Scheme Particulars.

All of the Jupiter Merlin portfolios carry the following fund risks:

• Currency (FX) Risk - The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
• Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
• Derivative risk - the Fund may use derivatives to reduce costs and/or the overall risk of the Fund (this is also known as Efficient Portfolio Management or “EPM”). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Fund.
• Counterparty Risk - the risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the Fund’s assets.
• Charges from capital – Some or all of the Fund’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion

Additionally, Jupiter Merlin Balanced Portfolio, Jupiter Merlin Conservative Select, Jupiter Merlin Income Portfolio, Jupiter Merlin Monthly Income Select, and Jupiter Merlin Moderate Select, Jupiter Merlin Income & Growth Select have the following fund risks:

• Interest Rate Risk - The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates e.g. the value of a bond tends to decrease when interest rates rise.
• Credit Risk - The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.

Furthermore, Jupiter Merlin Balanced Portfolio & Jupiter Merlin Growth Portfolio have the following fund risk:

• Liquidity Risk - Some investments may be hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund's ability to meet redemption requests upon demand.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.  The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change.  This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM. Please refer to the latest Prospectus and to the Key Investor Information Document (KIID) before making any investment decision. Particularly to the fund/sub-fund investment objective,  characteristics including those related to ESG (if applicable), and additional risk factors. These documents are available for download from www.jupiteram.com or can be obtained free of charge upon request.