Investment Update - Inflation and Omicron set the scene for investors

Markets signed off the year amid high inflation rates and renewed concerns over the coronavirus.

The Omicron variant of the coronavirus unsettled markets at the beginning of December, with investors unsure about how renewed restrictions on socialising and travel will affect the global economy. The Organisation for Economic Cooperation and Development (OECD) urged national leaders to accelerate the vaccination rollout in order to slow the spread of the virus and reduce the impact of new strains.

Stock markets in the US and Europe had recovered most of their initial losses by the middle of the month after being encouraged higher by reports that the variant would unlikely be as disruptive as first feared. Persistently high inflation is another theme that has dominated markets throughout 2021 and the readings at the end of the year provided no relief.

The cost of living rises

The UK’s inflation rate surged in November to 5.1%, which is its highest rate in more than a decade, and exceeds the Bank of England’s expectations. According to the Office for National Statistics, the Consumer Price Index was propelled upwards by soaring energy costs but prices rose across the board.

The euro area’s average annual rate of inflation rose to 4.9% in November, the highest it has been since the creation of the single currency more than 20 years ago. In Germany inflation stood at 6%, a level not seen since the aftermath of reunification three decades ago.

Annual consumer price inflation in America rose to 6.8% a 39-year high. Prices jumped by 0.8% from October to November. A range of factors have fuelled inflation lately, including supply chain bottlenecks, labour shortages, fiscal stimulus and ultra-loose monetary policy.

Central banks take action

Policymakers on both sides of the Atlantic decided to act. In the UK, the Bank of England has raised interest rates from 0.1% to 0.25%, its first increase in more than three years, saying that the risks of inflation required it to take pre-emptive action even as the Omicron wave of coronavirus engulfs the UK. The bank’s Monetary Policy Committee decided it could not wait any longer before seeking to cool the spending in the economy.

Meanwhile, the US Federal Reserve said it will accelerate its “tapering”—the reduction of monthly bond purchases—in order to wind down economic stimulus and contain runaway inflation. From January the central bank will reduce its asset-buying by $30 billion every month—double its current pace.

Key takeaways

• The Omicron variant of the coronavirus caused investors and the markets to experience a period of volatility in December.
• The UK’s inflation rate surged in November to 5.1%, prompting the Bank of England to raise interest rates to 0.25%.
• US stocks dipped ahead of the US Federal Reserve’s decision on its plan to accelerate the tapering of its bond-buying programme