Will The Rise In Inflation Be The Cause Of A Recession?

The last few years have been characterised by an environment that seems to be in constant change. For example, the cost of living has been increasing across the UK since early 2021. In May 2022, the annual rate of inflation was the highest it has been since 1982, and with the economic situation becoming less certain as time goes by it’s understandable how this may cause concerns for people about how this may affect their investments.

Is there likely to be a recession?

We’re now over halfway through the year and it’s fair to say we aren’t having the greatest year for stock markets, as well as the economy. Inflation in the UK is currently at the highest it has been in 40 years and the added demand for goods and services clashing with the pandemic-related supply chain constraints have made things difficult as well. However, it has been reported that inflation has not only risen in the UK, but it has also been the highest for 40 years in the US and Canada, whereas the European Union is at its highest level since the trading bloc was designed.

Concerns have been raised about the possibility of a recession due to interest rates being increased which has caused the stock markets to fall. However, this is seen as common around the world with markets being down and investors continuing to face unpredictability.

Certain factors can lead to a recession such as high inflation, a high-interest increase from central banks, and fears about slowing GDP growth as post-pandemic activity dries up, these types of factors are happening currently. This suggests that the UK will enter a recession this year. However, the extent of this will depend on whether the Bank of England can contain inflation without it having too much of an effect on consumers and businesses.

Stock market rates

As we have said above, it’s fair to say stock markets have followed a downward spiral this year as interest rates have gone up. However, because of this, stocks are now cheaper than their 10-year average. It is impossible to time markets when making investment choices, but having lower valuations, opens the door for share prices to look more appealing than they were before markets peaked.

Many investors actually gain by short-selling stocks because it allows them to receive a payout when share prices fall. However, they can also lose money if the stocks rise.

Long-term investors who put money to work during a recession have done considerably well over time, for example, viewing three recent recessions prior to the pandemic:

Also, if you choose to invest at a market’s lowest point during a recession, you’re likely to do quite well over time. One thing you do need to realise is that trying to time the market is almost always a losing battle. In other words, you are not going to invest at the absolute perfect time.

Comment

It is always advisable to seek professional financial advice when at all considering investing. Our team has a range of experts who can advise you on your investing.