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Richard Scrope
Fund Manager
In a world when inflation was rising, attention was paid to the year-on-year numbers as even if inflation should increase further - the lapping effects meant that the headline rates should begin to fall. The period over 2022/23 has seen an inflation wave that has felt like a tsunami. However, inflation moves in waves and although Patrick Swayze sought the “50-Year Storm” wave in the film Point Break, the down slope of the largest wave in 40-Years might be deemed an acceptable ride also.
The question now turns to whether inflation continues to fall, stabilise or we see a 1970’s type double wave. For the US, the period of easy year-on-year comparisons is over, and thus for the true change in inflation to continue to be negative, the headline rate would need to decline significantly from here.
Fortunately shelter (yellow in the chart below), the largest component of CPI, is starting to abate, and the more real-time surveys of shelter costs suggest that this will continue in the coming months. Thus headline inflation may go some way to offsetting these comparisons, fending off the risk of a 1970’s type double wave. There are, however, signs that the tailwind from commodities is showing signs of stabilising and the comparisons start to become less favourable.
To those expecting US inflation to fall significantly from its current rates, the numbers are stacked against this happening, and the picture gets even harder in 2024, thus we expect that true level of inflation is likely to remain higher for longer. As for the direction of US interest rates, which the Federal reserve continues to adopt a ‘data dependent’ mantra and continues to rule out cuts any time in the near term, we believe that less focus will be on the inflation numbers, and more on unemployment, which is likely to lead to pressure on the Federal Reserve to reverse some of the dampening effect of their measures to date.
Turning to Europe, the picture looks similar to that of the US, only with a delayed effect. The period of harder comparisons does not come into play until the back end of the year. However with the energy tailwind starting to dissipate, the likelihood of the ECB managing to get CPI in the region back within its target range looks less likely and European inflation may well stabilise at a higher level than that on the other side of the Atlantic.
Although UK inflation is falling fast from February’s level, the headline rate remains significantly higher than that of the US and the Eurozone and June was the first month where the true rate of inflation turned negative. We have however seen the first month of a true decline in inflation. If the Bank of England’s estimates are correct, which recent history would caution against, Inflation is expected to be at 5% by the year-end, conveniently below the threshold set by the Prime Minister by when he promised to cut inflation in half.
The world needs to adapt to higher rates and inflation becoming more cyclical than the what the era of zero-rates led many to believe was normal. We believe that in the long run it is healthy for the world to return to normalised interest rates and the ups and downs of inflation, however, the period of adjustment may not as plain sailing (or even surfing) that many hope for.
WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not