Investing & Performance | 08 March 2023

MONTHLY UPDATE: Inflation – sticky, stubborn, and still a concern

Interest rates might have to rise a bit more than expected and stay there longer before inflation starts falling properly.


When will inflation fall to more manageable levels? How high will interest rates rise and for how long? These key questions continue to weigh on investors’ minds and drive the performance of financial markets.

And we’re not out of the woods yet. Lilian Chovin, Head of Asset Allocation at Coutts, says there’s still significant room before interest rates reach their ceiling.

“Although at the start of the year inflation appeared to have peaked, US consumer prices rose by more than expected in January,” he said. “There’s evidence suggesting America’s economy may avoid a recession, at least in the near term, but inflationary pressures are proving sticky.

“As a result, the US Federal Reserve may have to raise rates further and hold them there for longer.”

It’s a similar story in the UK and Europe. There are signs both could avoid an imminent recession, but interest rates may have to rise a bit further and remain there for a while to cool the pace of economic activity.


Stock markets were reasonably resilient throughout most of February despite concerns about sticky inflation. But the expectation of prolonged, elevated interest rates took its toll a little, and some of the markets’ gains were lost towards the end of the month.

Bond markets also struggled in response to changing interest rate expectations, with government and corporate bonds giving up many of their January gains.

Meanwhile, China and other emerging markets underperformed last month, owing partly to the strength of the US dollar and its impact on the value of company profits there. The economic outlook for the region remains unchanged – uncertain – and we reduced our exposure last year because of this.

We’ve also reduced our exposure to Japanese government bonds recently. Since 2016, the Bank of Japan has implemented a yield curve control policy that has held yields artificially low. We believe steps could be taken to loosen, or even dismantle, this policy. This could push bond prices down and dent their performance.



It’s been just over a year since Russia invaded Ukraine and the war is showing no sign of ending soon. US President Joe Biden made a surprise visit to Kyiv at the end of February and said America would stand with Ukraine “for as long as it takes”. Meanwhile, European foreign ministers have been discussing how to make sure Ukrainian forces have enough ammunition.

The conflict has taken a heavy toll in terms of lives lost and displaced thousands of families who left the country.

It affected the global economy too, but its impact there has faded in recent months. Notably, last year’s dire warnings about gas shortages in Europe have not fully materialised owing largely to a relatively mild winter. But risks remain.

Elsewhere, the Chinese balloon that flew over North America before it was shot down over the Atlantic showed deteriorating relations between the two superpowers – which remain in dispute over territorial issues in the South China Sea.

Lilian said: “Geopolitical events tend not to impact asset performances. We’ll continue to monitor them closely, but we expect their impact to be limited from an investment perspective.”

Catch up with all our latest views through our insight articles and weekly podcasts.

Coutts’ clients can find out more about what’s happening in the investment markets and how it impacts their investments by speaking to their private banker.


Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.