Inflation will not be a persistent or systematic issue for UK investors, suggests Dean Turner, UK & Europe Economist at UBS GWM CIO.
Mr Turner believes that recent inflationary trends in the domestic economy are merely transitory, with the Bank of England forecasting a rise of three percent over the next few months, while consumer price inflation reached a two-year high of 2.1 percent in the year to May, according to a survey produced by IHS Markit/CIPS.
He said: “Overall, our sense is that what we're seeing in terms of the concerns about inflation becoming persistent and ingrained in the system look to be overdone at this stage. “
He attributed the rise in inflation to ‘base effects’ such as volatility caused by the pandemic and fiscal stimulus, which are driving prices higher in the near term. He suggested that the effects of inflation were not being felt in any significant fashion by the general population.
The UK & Europe economist explained: “When we look at measures that strip out volatility and trim mean measures of inflation, you can see that for the average household, the level of inflation through the economy today is not particularly high.”
This outlook comments follows his comments made in April, where Mr Turner said any inflation increases would not be a problem.
It is a perspective which is also supported by the Bank of England’s monetary policy committee. The group is opting against any direct further interventions in the market, guided by the perspective that the inflationary rates will subside. However, other voices within the institution have provided dissenting outlooks, such as departing chief economist Andy Haldane, who has urged policy makers to cut quantitative easing down from £895 billion to £845 billion. He has warned that the inflationary ‘tiger’ has awoken and will be difficult to contain without sustained policy actions.
Forecasting the future, Mr Turner presented a more optimistic picture, where such intervention would be unnecessary. He anticipated that a recovering labour market following the reduction of the remaining social restrictions later this year will mitigate inflation rates.
He concluded: “With recovering labour markets inflationary pressures will subside and that's going to be important for the second half of this year, because it means that while central bankers get a more hawkish in their rhetoric, the need to adjust policy swiftly or abruptly is unlikely to be there."
Mr Turner was speaking alongside Maximilian Kunkel, chief investment officer for GFO and Germany, and Caroline Simmons, UK Chief Investment Officer. His comments were made in the latest edition of UBS’ series of monthly calls focusing on ‘The Year of Recovery’.
