INFLATION UNDER SCRUTINY AS THE END OF LOCKDOWN CAUSES PRICES TO RISE SHARPLY

INFLATION UNDER SCRUTINY AS THE END OF LOCKDOWN CAUSES PRICES TO RISE SHARPLY

This week we have seen inflation remain the centre of attention. Market reaction to the doubling of CPI in April was more muted than the reaction in the US last week. This may be partly due to their being less at stake, as UK equities are less highly valued than some areas of the US, but more likely it is the much clearer case that inflation will be modest and transitory. For example, a significant part of the UK’s recent inflation has been the increased price of petrol but few people are predicting oil to increase from its current range of $60 to $70 a barrel.

Headline inflation is likely to keep going up in the short term, helped by a boost in consumer spending after lockdown – retail sales increased 10 per cent in April – but despite reports of some localised staff shortages and supply bottlenecks these pressures so far appear temporary. In contrast to consumer prices, UK house prices have continued to rise rapidly. Prices rose 10 per cent for the year to end March, the fastest rate of growth since just before the financial crisis. However, with the end of Rishi Sunak’s stamp duty holiday this too is likely to be temporary.

UK: RISING ENERGY COSTS SEE INFLATION DOUBLE IN APRIL

Inflation more than doubled in April as the recovery in oil and energy prices and resumption in consumer spending pushed the annual rate of inflation to 1.5 per cent, up from 0.7 per cent in March. Core inflation, which excludes oil and energy prices, increased less sharply than the headline figure rising to 1.3 per cent in April from 1.1 per cent in March.

The increase in inflation matched expectations from economists and the Bank of England but investors are trying to determine if the increase is temporary. Governor Andrew Bailey said there has been little indication that higher costs for producers influenced consumer prices in Britain and although he expects inflation to move above the 2 per cent target it should fall below this level by the end of 2022. The return of consumer spending after lockdown will also push up prices in the short term. Consumer spending increased 9 per cent in April as people returned to the shops, with sales of clothing and household good particularly strong.

OIL: IEA SAYS CUTTING FOSSIL FUEL USE NEEDS TO START IMMEDIATLEY

The International Energy Agency has outlined a stark future for oil and gas production. Its report on achieving net zero carbon emissions by 2050 says energy producers would need to immediately halt all oil and gas exploration and rapidly increase the use of clean energy. It says to meet the Paris climate accord target the world needs to cut the use of coal by 90 per cent and the use of oil and gas by 75 per cent by 2050. Using solar, wind, hydro and other renewables for the bulk of energy supply would see the average price of oil drop to $25 a barrel by the target date.

The report represents a big change for the IEA which has been a strong supporter of fossil fuels. The oil price has been falling this week but the cause is a more short-term concern. Progress in talks with Iran about suspending its nuclear programme could see sanctions lifted and bring Iranian oil supply online.

EQUITIES: WEWORK POSTS $2BN LOSS AS UK PROPERTY EYES RECOVERY

The latest update from flexible office provider WeWork shows the cost of pandemic home-working for commercial landlords. The company’s losses hit $2bn in the first quarter of 2021, up from a loss of $556m last year. It also lost around 200,000 tenants as Covid restrictions bit. In the UK, Land Securities posted an annual loss of £1.4bn as the coronavirus left its commercial retail tenants unable to operate for much of the last year and rental income fell 30 per cent.

The lifting of coronavirus restrictions has seen optimism begin to return to the property markets. Land Securities chief executive said the company is now in the recovery phase and it increased its full year dividend. Serviced office provider IWG also recently reported a sharp deterioration Q1 trading, with revenues down 21 per cent on the previous year but says the worst appears to be behind it with demand picking up in many global markets. Share prices for UK real estate investment trusts have recovered some of last year’s losses but most remain below their pre-pandemic levels.