Client Update - 12th August 2022

As temperatures continue to rise here in the UK, expectations of a 0.75% interest rate rise in the US in September cooled somewhat over the last few days with news that US inflation actually fell last month. This referred to the annual CPI reading, falling from 9.1% in June, to 8.5% in July after there was no increase in inflation between June and July. The main driver for this was weaker petrol prices. This was better inflation news after a very strong US jobs report last Friday – with 528,000 new jobs created, which was more than twice analysts estimates and with wages in the US growing by 5.2% - inflationary pressures still remain. A few years ago, these high jobs reports would be greeted as good news of a strong economy, not concerning news that inflation will be pushed higher for longer. Correct interpretation of market data is half the battle.

There was further bad news this week for the retail broker that dominated 2021. The US platform Robinhood’s market capitalisation has fallen by two thirds since its public floatation last year. Stock market tumbles, Crypto collapse, high inflation eating into savings and the end of free money from pandemic stimulus cheques in the US have led to a flood of investors leaving the platform as younger, less experienced traders have been unable to cope with the trading volatility so far in 2022.

It seems strange with such high temperatures at home to be talking about winter fuel bills, yet the question remains that with the Conservative party pre-occupied with their leadership contest, is enough being done to try and put pressure on electricity suppliers to use their profits to help those in most need, to fund greener energy or face windfall taxes that could be used to further support consumers over the months ahead. We know by now the story about rising energy prices being a combination of recovery in demand after the pandemic, falling relative capital investment in fossil fuel extraction and the disruptions caused by the war in Ukraine. There have been significant increases in energy commodity prices with the spot price of Brent crude oil rising from $50 per barrel in June 2020 to over $110 in the aftermath of the Russian invasion. It is close to $90 per barrel today. Natural gas prices have risen similarly. The current price for December delivery natural gas in Europe is at a record high, representing a more than 1100% increase over the last two years.

Quite aside from the financial aspect, with a redistribution of profitability from consumers of energy to producers, there are political and social considerations. Income inequality is worsened by a sharp increase in the cost of living and that is having political consequences. In the UK there has been a sharp increase in days lost to industrial strike action as workers demand higher wage settlements. More brutally, in Sri Lanka the government has been overturned by people protesting against higher food and energy prices. As governments recognise popular anger there is a risk of policy mistakes – such as the promises of large tax cuts being made by the two contenders for the leadership of the UK Conservative Party (and the next Prime Minister).

As always, there is a great deal going on throughout the summer and we are keeping a close eye on things for you, so please do enjoy the sunshine and have a good weekend.