Market outlook: infection rates, inflation and interest rates

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Richard Dunbar

February 09, 2022

5 mins read

There are a number of factors that could impact economies, markets and people’s savings and pension pots over the course of 2022. But ‘the three I’s’ – infection rates, inflation and interest rates – may be among the most important factors in the coming months. Find out more.

At Standard Life, we work with a variety of different fund managers to offer a choice of investments through our pension solutions. As part of our topical updates, we invite the views of investment experts from these managers. Here, Richard Dunbar, Head of Multi-Asset Research at abrdn, explains why ‘the three I’s’ – infection rates, inflation and interest rates –  will be among the most important factors to watch in the coming months.

Infection rates

I’m encouraged by progress on Covid. The vaccine rollout has been a success, particularly in developed countries. Developing countries have lagged behind on vaccinations, but the recent surge in uptake in China is good news. 

However, Omicron does give reason for pause. On one hand, Omicron is proving less virulent than Delta, and so is allowing a controlled resumption of the re-opening of the global economy. On the other, it again reminds us the world is only as good as the weakest link in the vaccination chain. This should concentrate the minds of global leaders on how they tackle the pandemic in the coming year, and allow the continued re-opening of the global economy. 


Inflation remains an important theme. After years of very low and steady inflation, prices are now rising rapidly. It’s becoming a political as well as economic problem, adding even more complexity to the mix. 

I expect inflation will remain high in the first part of 2022. However, there are signs – particularly in the US – that availability of raw materials is improving, transport bottlenecks are opening up and shipping ports are now running 24/7. These factors should help dampen price rises.

At abrdn, our calculations suggest inflation is likely to peak in the first or second quarter of 2022. However, the recent strength in some energy prices shows the risks to this view.

We do though need to watch wage rises, which are also fuelling inflation. Labour shortages stemming from a mixture of Covid and Brexit mean sectors like haulage and transport are having to pay higher wages to attract and retain staff. Ultimately, these higher costs are passed on to consumers or result in reduced profits for employers. 

Will the millions who exited the workforce return, thereby fixing the staff shortages? Or will we see wage demands broaden to sectors beyond those disrupted by Covid and Brexit? These are the questions for central banks, such as the Bank of England and the US Federal Reserve, as well as for investors.   

Interest rates

The third ‘i’ is related to the second. While investors are certainly watching inflation, central banks are watching it with an even closer eye. That's because, if inflation reaches persistently high levels, they’ll usually raise interest rates to discourage consumer spending. 

The head of the US Federal Reserve, Jay Powell, has recently reminded investors of their concerns about inflation. The Bank of England has echoed these concerns and indeed raised interest rates in December 2021. 

Even the more optimistic forecasts show US and UK inflation persisting at levels likely to make central banks nervous well into 2022. Although, as I’ve already mentioned, we believe they’ll peak by the middle of the year. 

From a market perspective, some of the interest rate hikes which may be needed to combat inflation are already anticipated by investors. That means markets are unlikely to be affected too much by further interest rate rises in the coming months. 

Rising interest rates can have a negative effect on share prices, as the cost of borrowing increases for individuals and companies. And it also means that just keeping money in a bank savings account (rather than investing it) becomes more attractive. But if inflation stays obstinately high, central banks may have to raise interest rates more than expected, potentially unsettling markets. 

Overall, what does this all mean for markets? 

At abrdn, we remain broadly positive on the outlook for most major markets, but less so than at the start of 2021.  

Persistent inflation will remain a feature, although as I’ve mentioned, we expect it to peak over the first six months of 2022 and then moderate. Interest rates will be higher than they are currently, but still low compared to history. This is because central banks are keen to keep supporting consumers and businesses, even as they look to curb inflation. Finally, we expect the Covid environment to improve but remain very uncertain. 

And what does this all mean for pension investors? 

The rise in inflation is an important reminder. Savers and investors often underestimate the damaging effects of inflation on their money. People on fixed incomes – such as those whose pension income isn’t inflation-linked, or workers on a static wage – are especially vulnerable to the effects of inflation.

As living costs rise, your money doesn’t go as far. To give an example, if prices rose 5% every year for the next 10 years, £100 in your pocket today would be worth only £55 in 10 years’ time.

That’s why it’s especially important for pension savers to think about what their savings might be worth once they retire – often a long time into the future – and consider how they can mitigate the impact of rising inflation as much as possible. This could make the difference between an enjoyable retirement and a frugal, worrisome one.

Even if you’re not relying on your savings and investments to fund your retirement or another future financial goal, you still don’t want to be in the position where you’re essentially losing money.

Want to consider if you’re saving enough for your retirement?

This retirement guide and pension calculator from Standard Life can help you work out how much you need to save for your retirement and if your pension savings are on track for the retirement lifestyle you want.  

If you need advice, speak to a financial adviser. Please note there’s likely to be a cost for this. You can find one in your area on 

Content in this section is provided by abrdn. It does not constitute any financial or other professional advice or recommendations. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed and actual events or results may differ materially. Information is based on abrdn’s understanding in January 2022.

Standard Life works with a variety of different fund managers to access and offer a choice of investments through their pension solutions. As part of our topical updates to customers we invite the views of investment experts from these managers. This content is not paid for. It’s purely a way to share a range of insights from across the industry. Content from external fund groups does not represent the views or opinions of Standard Life.



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