Behind the buzz: what's driving inflation?

Rising inflation is one of the biggest challenges for investors today and it turns out that covid, climate change and the war on Ukraine have had driving roles in this.

According to Paul Loudon, Portfolio Manager at Walter Scott, these concerns have all placed pressure on energy markets, supply chains and logistics. For example, lockdowns have mean shortages in supply and labour forces and in turn driven higher prices to meet demands.

While Loudon views some of these challenges as transient – after all, as lockdowns end and ports reopen, supply issues may start to ease – this is also a concern dominating central bank activity. The question facing many central banks is how aggressively they should raise interest rates to manage inflation.

“The worry is that higher rates will really lead to a weaker economy and by design, they will dampen consumer sentiment.”
Loudon cautions against short-term plays in this market.

“Over time, you’ve seen individuals throughout the investment world make bad decisions, selling out in times of maximum fear. Even if you make the first decision right, selling out at the start of a downturn; getting back in at the right time, is in our experience, incredibly difficult.”
He advocates a consistent investment approach across markets. For Loudon, it’s a long-term focus on quality businesses with characteristics like strong cashflow and pricing power.

In this interview, Loudon explores the drivers of rising inflation, the outlook for markets and investing in the current environment.

Key takeaways:

Energy markets, supply chains and logistics are significant drivers behind rising inflation.
For the inflationary outlook to change, investors can consider a combination of signals like increasing supply, lower energy prices or more people returning to the workforce.
Investors should be wary of selling their holdings in times of volatility and consider their longer term strategy.
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