Jan
2025
Inflation – what can we expect in 2025?
DIY Investor
1 January 2025
For much of 2024, inflation has been on the wane. A key question now for investors is how it will behave in 2025. Tim Bennett, Head of Education at Killik & Co suggests the factors investors should watch out for, and what they could do to ensure they are ready for any resurgence
Inflation can be a headache for consumers and investors, which is why central banks try to keep it under control. Let loose it can:
- Erode the real value of wages and investment returns
- Suppress spending, as products and services become unaffordable
- Increase “discount rates” on investments such as equities and thereby potentially dampen prices
- Increase the cost of servicing debt when interest rates rise to combat price rises.
What might keep it low in 2025?
Looking ahead to 2025, there are reasons to be quietly confident that inflation may stay tamed. That is certainly what the Bank of England is relying on if it is to cut rates again next year.
Firstly, supply chains have been stabilising across much of the world following the huge disruption caused by the pandemic and associated lock downs. Next, economies are now adapting to the devastating consequences of the wars in Ukraine and the Middle East. Thirdly, consumers are under pressure here in particular and are naturally reigning in spending as a result.
Reasons not to be complacent
That all said, there are forces at work that could upset such a rosy view of the world.
Although it is not yet clear how widely the rumoured US tariffs may be imposed by Donald Trump, the risk of an escalating trade war with China, should Beijing respond in kind, is real and would be inflationary.
Meanwhile, tax rises in the UK are coming in all the time, with a substantial change to the employer’s national insurance rate due in April 2025. Many businesses might try to pass this onto customers by raising prices.
Then there is government borrowing and spending plans, which could prove inflationary once they kick in.
How will we know if inflation is rising?
Whilst there are several indicators investors could watch, with two good ones being:
- The 10-year gilt yield, which sets the bar for borrowing rates across the economy and is a lead indicator of where markets think inflation and interest rates might be headed
- The “Truflation” number, which often acts as a bellwether for the subsequent published data.
What should investors be doing about it?
The keys to managing inflation, whatever it does next are:
- Always focus on real (post-inflation) returns
- Maintain an adequate but not excessive cash buffer
- Review the rates you are paying on debt and look to lock in lower ones
- Keep a watchful eye on the inflation related data
- Stay invested – inflation is not necessarily bad news for equities
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