Conversations Turn Back to Interest Rates & Inflation

In my last market update, I spoke about the October inflation data creeping back above the government target to 2.3%. A rise from 1.7% in September 2024. This may have got you wondering why inflation numbers are so volatile and what does this mean for interest rates. For some parts of the economy such as the services sector, everything from restaurants to tradesman they are still seeing significant price rises on the cost of goods and food, to which some of this price pressure is being passed onto consumers, leading to increased prices.

What many have been suggesting is that this means for interest rates will likely to stay higher for longer. In November we saw the Bank of England drop the base rate to 4.75%, a largely expected move. Today, the head of the Bank of England, Andrew Bailey, has suggested that they are still on track for 4 interest rate cuts in 2025 if inflation data continues at consistently low levels. A promising indication for borrowers.

Some may challenge this response, following Rachel Reeves Autumn Budget, with her announcements of increased taxes particularly on businesses (with the increase to National Insurance paid by employers) is has widely been suggested this will lead to price increases and jobs being put at risk, subsequently having an inflationary impact on the economy.

I would argue that we have entered a new normal of higher interest rates at 3-4% and inflation sitting at 2-2.5%.

Trump and Tariffs

Last week, Donald Trump made an announcement that he intends to place import tariffs on countries exporting their goods into the US. This forms part of his pledge to make the US more self-sustainable and deglobalize their approach to manufacturing and industry.  His initial suggestions are that he will put tariffs of up to 25% in place for Canada and Mexico. This naturally has created anxiety amongst other nations who are big exporters to the US, namely China, Europe and the UK. The impact from a UK perspective has the potential to be significant particularly as post Brexit a lot of our exports go to the US. Should tariffs be applied we will likely see prices increasing and subsequently inflation rising.

Investors start to return to UK Equities  

Throughout October we saw significant outflows from the UK as investors scrambled to minimise the impact of the much-anticipated Labour Autumn Budget. What we have seen post budget is a sense of clarity in the market, that regardless of our political stand both here and in the US, at least we have some clarity on our position for the next four years and what the rulebook looks like.

The UK continues to look relatively cheap compared to other parts of the market and hence could present an opportunity for investors in this space.

The power of AI

The past twelve months the S&P 500 performance and market commentary has been dominated by the fast-paced growth we have seen in AI and technology stocks. We have seen investors piling in to invest in AI and take advantage of the hype/ upside. I think we can all agree that AI is here to stay and will have a significant impact on society. But when it comes to investment opportunities the more AI firms that enter the market the more saturation and price pressure for these businesses. I would argue investors would be better placed to turn their attentions to some of the companies that AI can have the greatest impact- the hospitals, utilities and financial companies, placing focus on transformational activity rather than just solely focusing on the technology itself.

Looking ahead to 2025

I said this last week and I am going to repeat again, with asset classes continuing to rise, it is more important than ever to remain diversified in our strategies and focused on your own short-, medium- and longer-term goals. As we look ahead to 2025, it presents a great opportunity to take stock of what you have and start to build your own plan as to how you can structure your money to work as hard as you do to earn it!

Frankie