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Inflation has been a hot word over the last 18 – 24 months and its persistence is still having an effect on all our lives. Inflation occurs when there is a broad increase in the price of goods and services. It means you can buy less for €1 today than you could yesterday. In other words, inflation reduces the value of your money over time. For measuring inflation, all goods and services that households consume are taken into account including everyday items such as food & fuel, durable goods such as clothing & home appliances and services such as beauty, insurance & rented housing. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy.

Inflation has started to show signs of easing from the multi-decade highs reached in many countries following Russia’s invasion of Ukraine. Inflation has fallen since the highs of last year with inflation in Ireland currently at 6.6%, the United Kingdom is at 8.7%, the USA at 4% and the overall Eurozone at 5.5%. Central banks have reacted with a series of interest rate rises, even though higher borrowing costs could intensify the squeeze on real incomes. The US started increasing interest rates before the Eurozone which has resulted in inflation falling to the lowest point in over two years, however even though inflation is falling, the persistence of labour market tightness and the apparent resilience of the economy means the market is pricing around a more-than 90% chance that the Fed will hike interest rates to a range of between 5.25% and 5.5% at its meeting later this month.

There is still the possibility of a recession. The effect of rising interest rates on economic growth usually lags. Central Banks will want to cool the labour market in order to reduce the demand for rising wages which are one of the main triggers of inflation. Some economists believe that a recession, in the US economy especially, has been postponed rather than avoided. In saying this, the US economy grew much faster than expected in the first quarter of the year, unemployment is ultra-low, job growth remains solid, and inflation is decelerating fast. However, leading indicators (signs that predict future events) have been pointing towards a recession for over a year now.

An inverted yield curve, falling consumer confidence, weaker industrial production and less bank credit are some of these indicators. The lead time between the appearance of these indicators and the start of a recession has ranged from nine months, in the early 1970s, to 22 months, before the Great Financial Crisis in 2007-09. The lag time in our current cycle is 17 months and counting. This means that we are not out of the woods just yet when it comes to avoiding a recession however if a recession does not happen before the end of the year it will mean that it will be the longest ever lead in time should one happen.

On the 10^th of July, Citigroup downgraded US stocks in anticipation of a pullback in growth stocks (such as the tech sector) in the fourth quarter. It warned that growth stocks were set for a pullback as the "euphoria" around artificial intelligence enters a more "digestive" phase. The S&P 500 has gained 14.6% so far this year, while the tech-heavy Nasdaq jumped circa 31%, driven mainly by a handful of tech stocks that rode high on AI potential. This shows that Investment Banks are still cautious about the global economy, especially the US.

The outlook is uncertain. There is hope that we will avoid a recession or if a recession does happen we will have a ‘soft landing’. Now would be a good time to review where your Pensions and Savings are currently invested in (particularly if you plan to access any of this money in the next few years!).

Marie Carr, CFP^® MSc BBS QFA RPA SIA is a CERTIFIED FINANCIAL PLANNER™. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on marie@jfl.ie.