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The whiff of slowdown, or perhaps recession

It’s difficult to imagine what a “fair peace” settlement between Russia and Ukraine will look like, or rather, the difficulty lies in envisaging the Kremlin agreeing to what most of the rest of the world would see as a fair deal.

Talks are taking place, with Russia insisting that Ukraine must agree not to join Nato. Ukraine presumably will want to maintain its ability to defend itself from any future attacks, for Russia to accept its right to exist as an independent state and for it to make reparations to rebuild the cities and buildings that it razed to the ground. To pay compensation for the killings, injuries, loss and displacement of millions of people. History of course teaches us that it’s not a good idea to take the punishment too far. 

No one is convinced that the peace talks are not simply a way for Putin to buy more time and boost his chances of a victory. The relentless bombardment of Ukrainian cities continues. But whatever the duration and outcome of this war, the extent of the damage wreaked on a country that, incidentally, grows much of the world’s agricultural produce, and supplies other valuable commodities, is clear to see.

The lasting effects of the destruction and the mounting refugee crisis are sounding new alarm bells over the future level of inflation. There is no escaping the fact that supplies of oil, gas, wheat and key metals are at greater risk than before the war. John Rich, executive chair of Ukraine’s leading food supplier MHP, outlined to the FT this week his fears for the crucial spring planting season which would considerably worsen the disruption. China’s imposition of a new strict lockdown on millions of its citizens as Covid runs rampant again adds to concern. 

If we thought we had an inflation problem before Russia’s invasion of Ukraine, it may turn out that we were only staring at a molehill.

Certainly with new supply disruptions looming, the transient argument has had a few holes punched in it in the past two weeks. Next month energy price rises and tax hikes will finally arrive and mean a real fall in disposable income. After that there could be worse to come - already the range of March inflation forecasts are at 8 per cent plus - how will consumers react then?

Treating this bout of inflation is doubly difficult, which increases the chances of it becoming a more permanent feature. In the UK output rose in January to 0.8 per cent above its pre-pandemic level. It’s this sort of delicate but badly needed recovery that the Federal Reserve, Bank of England and ECB will be reluctant to stifle with a heavy handed approach to inflation, however much they want to cool things down. Hence the Fed's gentle quarter point rise on Wednesday. The fact is that so many of the factors behind rising prices remain entirely out of the banks’ reach. As AJ Bell comments, how much power their interest rate and quantitative easing policies can have right now is a moot point - none of them “can print oil or gas or aluminium or copper”.

Thus the risks of a global slowdown or even a recession have increased. Perhaps most of all in the EU. Amundi expects eurozone inflation to remain stubbornly high throughout this year particularly for food and energy, and hasn't ruled out the possibility of stagflation.

But it’s a tricky act for investors too, particularly for anyone whose time horizon is short-term. Should you invest tactically to align your portfolio with events and protect yourself from the new threats emerging, or stick with the portfolio you have constructed? It’s an issue that Dave Baxter discusses in his column on page 36 as he outlines some of the dangers of weaving in and out of asset classes.