His view is that, for example, while government policies shielded consumers from some of the effects of higher energy costs, this policy action actually contributes to inflation as the higher price is still being paid, and the existence of the higher price in the economy may mean others are able to increase the price of their goods and services.
He adds that as long as there are labour shortages, and some sectors of the economy where companies have an outsized share of the market in which they operate, price and wage costs can keep rising regardless of central bank action.
Jane’s view is that while the headline effects of last year’s sharp rise in energy prices will fall out of the data later this year, and so reduce the headline rate of inflation, he believes cost of living supports create “canned heat” in the economy, as they increase the level of spending power for individuals, but do not address the route causes of the higher prices, and so do not have a deflationary impact.
He says that while an economic slowdown is likely coming, he doesn’t believe it will be of a magnitude to reduce inflation as he feels consumers and businesses continue to have sufficient savings.
Venetis says global economic data actually points to an uptick in economic demand of late, but that while the input costs associated with manufacturing have been falling, inflationary pressures have transferred to the services part of the economy, and away from manufactured goods.
This matters because the factors which determine service sector inflation, including wage costs, could be more sticky than those associated with manufacturing, because the manufacturing inflation was influenced by damaged supply chains resulting from the pandemic and those can ease, as economies re-open, but the factors causing the services sector inflation are less transitory.
Investment implications
Jane says one of the outcomes of the current economic conditions is that there are more opportunities for income investors, with both bonds and many areas of the equity market now offering what he views as attractive yields.
He says the key to the attractiveness of equity yields right now is that its not just the economically sensitive areas of the market that offer a decent income.
Jane says: “You buy cyclicals, defensives, industrials and even some growth areas and as an income manager you don’t have to just buy yields you obviously have plenty of growth also. Mind you next decades growth is likely to be primarily hard asset growth.”
Julie Dickson, investment director at Capital Group, believes the next phase of the market will be characterised by investors placing a higher priority on companies that pay dividends, which she feels has not always been the case over the past decade.
