September 2021

The autumn push towards Christmas 2021 has begun, and with some volatility in equity markets to set us off. The UK government has completed its re-shuffle and the next Budget from the Chancellor, Rishi Sunak MP, is set for the end of October (Wednesday 27).

Markets have remained largely buoyant during 2021, and certainly through the first half of the year. However, the summer has seen economic, production and supply chain issues coming to the fore as many global economies start to emerge from the effects of the lockdowns and demand for capacity rises.

There has been much recent media comment on supply chain issues and shipping delays, and in the UK this has particularly focused on the lack of lorry and goods vehicle drivers being available (even relaxing current legislation to help swell numbers). Many producers have employed the well-known 'just-in-time' production methods of the last century to create and deliver their products and this appears not to have sat well with the current logistics. Vital parts within the supply chain, such as semi-conductors (perhaps micro-chips to you and me) have been in very high demand, and many production lines (particularly automotive) have had to close or slow production because of this issue.

In part because of this, prices across the developed world have risen quickly, along with wage increases. Inflation is, as the time of writing, on a steep upward trend. The view from the Bank of England, and a few other central banks, is that a period of above target inflation will be relatively short-lived, trending back toward the 2.0% target perhaps by the end of next year. The Consumer Prices Index (CPI) reached 3.2% in August 2021 according to the Office of National Statistics (ONS). More can be found here:

As a reminder, inflation is not normally a bad thing; indeed, stagnation and deflation are worse. High inflation can be difficult, but it has its advantages, especially if you have high debt levels (as noted below), simply because inflation has the effect of eroding debt. Some might think that a healthy bout of inflation might erode the debt that governments have amassed. There is nothing new in this thinking - just look back to the UK economy of the 1970s and 1980s.

Let's head back to the pandemic (sorry!), and the mountains of debt that governments across the globe have taken on. It's a bit quiet on that front, but whilst borrowing costs are so low, piling on debt for many nations has been cheap, and if it keeps the all-important cashflow going then most have considered it a price worth paying. However, this does not mean that the debt is under control, or that a planned pay-down process is in place. Some major economists have indicated their approval of additional national borrowing to get their respective economies going first, and then worry about it later. The most recent figures note that public sector net debt was equivalent to 98.8% of Gross Domestic Product (GDP) at the end of July 2021. Perhaps the money taps are going to slow, and more detail can be found here:

As the western hemisphere starts its journey into winter, many governments remain concerned about the new variants of COVID-19, and going further, are more concerned by the pressure that may be laden on health systems by the combination of flu and coronavirus infections. It was good to see that our own NHS may well be better funded looking forward, although the use of a National Insurance add-on (from April 2022) seems an awkward way of achieving the required funding. The government cannot just keep borrowing.

From a personal financial planning perspective, we have not really had to deal with high inflation rates for over a decade. If base rates rise to control inflation if and when it increases, this might mean higher deposit returns, increased annuity and mortgage / loan rates and higher costs in the shops. Equities may gain as the spending filters through, but they might need to, to pay for higher price goods.

As an additional note, and of course not a guarantee for the future performance, dividend yields from equities have started to return post-pandemic, and this was noted in the press recently here:

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With these observations made, we remain optimistic for growth and returns over the balance of 2021, although there are some headwinds as economies find their feet, and a way out of the lockdowns that most have experienced over the last year or so, and in some instances continue to fear this autumn.

No individual advice is provided through this webpage or website

Keith Churchouse FPFS


CFP Chartered FCSI

Chartered Financial Planner

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