Investors are being urged to approach recently published inflation rates with caution, warning that the conflict in Iran will forces prices higher and drive more volatility in the market.
This week, The Bank of England announced an inflation figure of 3 per cent suggesting that price pressures had been stabilising, with CPI holding broadly steady over the last few months.
This reflects a period where lower fuel costs and easing services inflation were helping to bring the headline rate closer towards the Bank of England’s target. However, the outlook has become considerably more uncertain in recent weeks.
Mike Ambery, Retirement Savings Director at Standard Life, said the escalation of conflict in the Middle East and the resulting sharp rise in wholesale oil and gas prices have the potential to push inflation higher again as we move through the year, and expected increases in the energy price cap from July and October could become key pressure points.
“The impact is unlikely to be limited to energy alone with wider cost pressures – from food to technology supply chains – also likely to feed through. As a result, markets have already begun to reassess the path for interest rates, with expectations shifting noticeably in recent weeks. While today’s data does not yet capture these changes, policymakers are increasingly focused on what comes next rather than what has just passed. As the Bank of England signalled in its recent decision to hold rates at 3.75 per cent, the path back to target is unlikely to be smooth, and policy is likely to remain cautious as these pressures play out,” Ambery said.
Elsewhere global public markets are sending increasingly volatile signals to institutional investors. In fixed income, “pandemonium” has taken hold, noted Mathias Neidert, Managing Director and Head of Fixed Income at bfinance, who said bond yields are surging and long-held theories around interest rates and investment diversification are being challenged.
“In an environment where rate expectations can shift dramatically within weeks, inflation risks are re-emerging, and traditional correlations are breaking down. US Treasury yields have climbed to multi-month highs following three consecutive weeks of losses, driven by rising oil prices linked to the Iran conflict and a sharp repricing of monetary policy expectations. Just weeks ago, markets had fully priced in two Federal Reserve rate cuts this year; now, interest-rate swaps point to roughly a 30 per cent probability of a hike by October. The Bank of England and the ECB have also indicated that policy may need to remain tight.”
Neidert added that while early signs of recovery are emerging in private markets such as real estate, with improving liquidity and renewed investor interest in sectors like logistics, “these developments remain secondary to the immediate repricing underway in liquid public markets, where institutions are being forced to react in real time”.
