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Our views 17 November 2023

ClockWise: The return of ‘Spikeflation’

5 min read

UK inflation has halved from its October 2022 highs. This is a welcome but not unexpected development, with the surge in energy prices of 2022 dropping automatically out of the year-on-year comparison period.

However, in level terms the cost of living is still an eye-watering 22% higher than it was in April 2020, or 29% using the old Retail Price Index which includes mortgage interest payments. The big question for investors and consumers alike is whether this spike in inflation was a one-off or a taste of things to come. We suspect the latter.

Our base case is for inflation to fall further over the next year or so, especially if high interest rates push economies into recession, but we do not see a return to the regime of low, stable inflation that persisted from the early 1980s until Covid hit in 2020.

You could argue that the high levels of inflation seen worldwide since Covid were related to one-off factors: excessive fiscal and monetary stimulus left too long in a supply-constrained world economy and the oil embargo following the Russian invasion of Ukraine. However, we believe we have entered a new era of what we are calling ‘Spikeflation’. This is a regime characterised by periodic upwards shifts in the price level on the back of structural drivers including the transition to net zero, heightened geopolitical risk, demographics and deglobalisation (figure 1).

Figure 1: Structural drivers of ‘Spikeflation’

Figure 1: Structural drivers of ‘Spikeflation’

Source: Royal London Asset Management, for illustrative purposes.

We don’t see governments and central banks standing in the way of higher inflation, given the part it can play in easing the burden of public and private debt. For example, while the Bank of England overshot its inflation target by a cumulative 15% since Covid, there is absolutely no intention to squeeze the economy sufficiently for inflation to undershoot by 15% over the next few years. Bond issuers (including the government) will end up repaying 15% less than they expected in real terms.

A period of spiky inflation would be very consistent with the historical record. Inflationary eras around the two World Wars and in the 1970s did not see high, stable inflation. They saw a series of individual price level shocks which in aggregate resulted in a twofold to more than fourfold rise in the cost of living. The measured annual rate of inflation over these periods fluctuated wildly, from close to zero to more than 20% (figures 2 and 3 below).

Figure 2: UK retail prices index, price level and year-on-year inflation

Figure 2: UK retail prices index, price level and year-on-year inflation

Source: LSEG Datastream at 15 November 2023.

Figure 3: Periods of high inflation since 1900

Figure 3: Periods of high inflation since 1900

Source: ONS Retail Prices Index, long run series; *post Covid period to date as of October 2023.

A new era of Spikeflation has three major implications for investment strategy.

First, investors should consider including inflation-hedging assets like commodities or commercial property in their multi asset portfolios in an attempt to maintain greater purchasing power.

Secondly, they should consider a more active approach to asset allocation suited to a period with more frequent recessions as central banks repeatedly step in to bring inflation under control. We use an Investment Clock approach to adjust exposures as the business cycle evolves (figure 4).

Lastly, they should look to manage downside risk, especially in decumulation. More frequent recessions mean more frequent bear markets and greater sequencing risk when drawing down income and capital from a portfolio.

Figure 4: The Investment Clock linking the business cycle to asset class rotation

Figure 4: The Investment Clock linking the business cycle to asset class rotation

Source: Royal London Asset Management as at January 2023.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.