One of the main 2021 takeaways for everyone will be the rising cost of living, from petrol, to houses, to coffee. Increasingly, companies are signalling the passing of costs to consumers, driving inflation, which is likely to reach 5-7% in the UK and US.

Inflation will likely stay at elevated levels in early 2022 before gradually falling back towards year-end. Supply bottlenecks and energy prices should ease gradually, though inflationary pressures will exist in wage growth however and ESG (environmental, social and governance) and net zero policies may create costs which could offset some of the deflationary effects of new technologies. Nevertheless, we don’t think that inflation will become unanchored globally and rising prices can still be considered supportive of economic growth.

Rising inflation has seen markets begin to ‘price in’ interest rate hike expectations. The eventual pace of the US Federal Reserve’s ‘tightening’ of monetary policy by raising interest rates will be a key driver of asset markets in 2022 and 2023. Central banks will be cautious not to let bonds yields rise in an uncontrolled fashion however and any increase in bond yields should be gradual and limited (as inflation declines) in 2022. The UK, where inflation expectations are high compared to other G7 countries, is similarly expected to raise rates in 2022 but the economic backdrop is not as strong as in the US. In the Eurozone, the European Central Bank will be more hesitant to raise rates as it remains much further away than the Fed from its inflation targets over the past decade.

Despite being on track to show 2021’s strongest growth among the G7 economies, the UK faces stronger headwinds than its peers for 2022, with Brexit a compounding factor. The on-going tensions between the UK and several European countries, as well as some well publicised labour shortage issues in the UK, have served as a reminder that Brexit as an economic narrative did not end on the 31 of December 2020. Brexit can accentuate the issues of supply chain disruption and inflation in the short term and is probably one of the reasons why UK inflation expectations are higher than in other G7 countries. While the strength of the housing market and higher wages will help the UK economy continue to grow above trend in 2022, Brexit, expected tax rises and lingering consumer price inflation may make the Bank of England’s actions particularly difficult to anticipate, potentially with a knock-on effect in the price of sterling and gilts (UK government bonds).

Global politics remains a space that rewards vigilance over predictions when it comes to investing. Since 1939 we have held data on over 30 major geopolitical events. While the ability to exit the market just before a political led correction can avoid losses, on average, markets have been shown to be up by 15% within 12 months. Consequently, we maintain that a good approach is to be aware of the nature and financial impact of these events but to be ready to go against the noise and the crowd and buy into markets to make the most of the upside.