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Inflation Commentary: “Weak Sterling and Higher Cost of Commodities giving Inflation a fair wind”
James Klempster, Head of Investment Management at Momentum UK, said:
“The continued weakness of Sterling and simultaneous increase in the cost of key commodities such as crude oil continues to drive inflation. This has taken us a long way away from the dark days of perceived economic stagnation and the spectre of deflation that market participants were becoming anxious about a couple of years ago.
“In the short term, a base effect-driven increase in inflation does not prove elevated inflation is here to stay. But with employment relatively firm, if workers are able to embed these inflationary moves in their wage negotiations then we may see a persistently higher level than we’ve become accustomed to.
“Over the long-term we’d expect asset classes to provide returns in excess of inflation because they require that investors adopt some risk to own them – and that risk should be rewarded all else being equal.
“If inflation does remain elevated, then this will become reflected in asset pricing. The transition in pricing from this low inflation world to a higher one would be painful, especially for holders of fixed income securities where price is inversely related to yield.”
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