Chart of the month: Inflation and the pound

  • 03 December 2019
  • 5 minutes

The Santa rally

There is a phrase in investing called the Santa Rally. Perceived wisdom states share prices rise over the last weeks of December into the New Year. There are several theories about why this happens from increased optimism fueled by the holiday spirit, to institutional investors trading their clients’ portfolios before going on holiday [1].

The chart below shows how the FTSE All Share Index has performed over the past five years. The green shaded areas indicate a so-called Santa rally where stocks have indeed risen over the last three weeks of December and into January.

These figures refer to the past and past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and is not guaranteed, and you might not get back your initial investment.

The other line shows the official rate of inflation in the UK, as measured by the Consumer Price Index. The target rate of inflation is 2%. If inflation is above this, the Bank of England can raise interest rates which increases borrowing costs and reduces spending. But the Bank would face a challenge if economic growth were to fall while inflation also rose. There is the potential for the uncertainty associated with a no-deal Brexit to present this situation, which is why Bank’s Governor, Mark Carney, refers to other Brexit outcomes as “smooth”.

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