Interest rates continue to rise on both sides of the Atlantic as inflation keeps climbing, and that’s making investment markets a bit unpredictable at the moment.
But we’re seeing signs that inflation could be peaking in the US and may start to settle. This matters because America is the world’s biggest and most influential economy, and is therefore extremely important to global investments like those behind the Ednites Credit Union Invest funds.
The US economy is actually holding up pretty well. The country’s employment market, for example, is in rude health, with over 400,000 jobs added each month so far this year.
Lilian Chovin
Head of Asset Allocation at Coutts, the bank behind the Ednites Credit Union Invest funds
We all know that prices rise over time – inflation is the economic term used to describe that. And the rate of inflation that you often see reported in the news shows how quickly they’re going up.
Market conditions are highly unusual right now because we have rising inflation alongside slowing economic growth. Usually, higher inflation accompanies a strengthening economy – people have more money to spend, they spend it, and prices go up.
But we’re still seeing the consequences of the coronavirus pandemic filter through the economy – people finding themselves with some extra money after lockdown just as suppliers struggle to meet demand.
This is pushing up prices, which means central banks like the UK’s Bank (BoE) are removing their support for economies to tame inflation, just as those economies are slowing.
The most recent consumer price index (CPI) figures for the US came out earlier this month, and they showed a slight drop. Year-on-year headline inflation was down to 8.3% from 8.5% in March. A small fall, but one that suggests US inflation might be reaching its ceiling.
The CPI numbers also showed that wage growth in the US was cooling and goods shortages were easing, which could relieve some of the pressure on America’s central bank, the US Federal Reserve (Fed), to tackle inflation.
The Fed itself also suggested that price pressures could be reaching their limit when it last announced an interest rate rise.
On 6th May, the BoE raised interest rates for the third time this year by another 0.25% to 1%. Similarly, across the pond, the Fed raised its interest rate by 0.5% to a range of 0.75% to 1%.
At the same time, the BoE warned that the economy could shrink rather than grow in the last three months of 2022, and could contract next year. But any discussions surrounding a shrinking economy are very speculative and not at all certain at this stage.
It’s certainly true that markets are facing some very real challenges right now, but the signs of inflation peaking, solid company performance and no indication of a US recession are all positives worth keeping in mind.
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