Looking at how the stock market has behaved recently, it is hard to see what we all might have been concerned about as 2022 got underway. With the FTSE 100 Share Index having reached a level around 2% off the all-time high in the past few days, investors appear willing to put geo-political, pandemic and inflationary worries behind them. Lightening the restrictions associated with Covid will have helped, but with interest rates well below the rate of inflation, perhaps it is the lack of alternatives that is driving demand.
Certainly, house prices are on the up all around the world, suggesting a belief that inflation could be higher for longer. True, Halifax has reported a slowing of the rate of increase in the value of residential property, probably due to the belt tightening that price rises are encouraging, but the past year has seen a remarkable uplift in values in some parts of the country. If nothing else, the pandemic has clearly engendered a rethink in how people might choose to work in the future.
Meanwhile, it remains rising energy costs that grab the headlines. It is an ill wind that blows nobody any good though, as BP’s share price bears witness. Unsurprisingly, the benefit that this energy giant has gained from rising oil and gas prices has renewed calls for a windfall tax on the profits of these concerns. Whatever the likelihood of such a move, the share price didn’t suffer and it has become increasingly clear that the imposition of such a tax would be difficult and not necessarily result in much gain to the government’s revenue.
Inflation and the prospect of rising interest rates seem set to dominate investor thinking in the months ahead. It is interesting to look back at earlier periods of high inflation. In the 1970s, when the cost of living was rising much faster than now – again driven by the price of oil skyrocketing, central banks allowed inflation to devalue debt before acting decisively. Despite murmurings that interest rates need to move higher to choke off price rises, such increases as we have seen so far appear modest compared with the rate of inflation. Perhaps lessons have been drawn from the past.