Investment Outlook November 2021: No time for stagflation in the UK

04 November 2021

Surging energy prices have contributed to inflationary concerns, at a time when economic growth momentum is weakening. This has led to concerns over potential stagflation, where inflation pushes prices up faster than wages and profits, forcing consumers and businesses to cut back on expenditure.

Previous episodes of stagflation have been bad news for stock markets. The last time developed countries experienced stagflation was in the period 1973 to 1982, following a series of oil shocks. US stocks performed particularly poorly over this period, declining at an annualised rate of -1.5% after inflation.

However, stagflation remains only an outside possibility. Strong GDP growth is allowing firms to pass on higher input costs to consumers without denting demand. The trade-off between growth and inflation is still favourable for fundamental company earnings, which – ultimately – are the key driver for share prices.

There is little evidence that overall company profit margins are being eroded by rising input costs, such as raw materials and wages. The UK MSCI forward profit margin (as a % of sales) has continued to trend upwards since its trough in June 2020. Recent macro data shows that the UK economy is weathering the supply squeeze well.

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