Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Investors are getting used to finding the bad news hidden among the good. For every report of ‘growth’ here or ‘rising figures’ there, there’s just a hint of concern that the economic kettle may be about to boil over. That’s making life very difficult for investors who don’t know what to trust.

Yesterday’s good news concerned the service sector, one of those most brutally affected by the pandemic.

Service companies saw a huge surge in demand over May. IHS Markit’s Services PMI survey showed that activity at UK service providers rose to its highest level in 24 years. New orders increased at their fastest pace since 2013, while staff numbers grew by the most in over six years.

That’s the good news. The (potentially) bad news is that, alongside the tremendous service growth and rising hiring figures, came reports that the service industry is scrambling to find staff to meet demand. The British Beer & Pub Association said some landlords have been forced to shut their pubs as a result of labour shortages.

That may come as a surprise. Given the opportunity, and the way in which the pandemic devastated so many livelihoods, you’d imagine companies would be struggling to choose between applicants, not to find them.

It’s a strange and potentially worrying trend. It’s also unclear precisely what’s caused it.

Here in the UK, there’s Brexit to contend with, as fewer EU workers travel to Britain to find a job. Pandemic restrictions have also made some service work more labour intensive.

There are also issues around finding skilled workers, which go beyond the pandemic and aren’t exclusive to the service sector. A KPMG survey found that demand for workers was particularly acute in IT and computing, as well as hospitality.

There’s also a more contentious argument around whether some people have become reliant on government pandemic-support.

That view was touted with fervour last month in the US after a set of massively underwhelming employment figures in April. Only 266,000 jobs were added in the US last month. At any other time, that would be a very strong showing. In the context of the pandemic, it fell far short of expectations.

These are odd times, and markets are struggling to know what to do with jobs figures. On the one hand, poor jobs data may keep stock markets happy. US markets actually leapt to the news of April’s poor showing. Their thinking was that fewer jobs demonstrates the economy still needs support, which means the US Federal Reserve is unlikely to taper its money printing, which means interest rates should remain low. All that is good for the kind of tech-focused growth stocks that dominate US markets.

But there’s a flip side here too. As was the case for UK service companies, US employers weren’t recruiting in April not because they couldn’t afford to, but because they were unable to fill vacancies. For whatever reason, job supply was exceeding demand.

A natural consequence of a tight labour market like this would be for companies to increase wages in order to attract staff. Higher wages would lead to higher consumer spending and higher costs for companies. That could then lead to higher prices - which lands you slap bang in the middle of a perfect inflationary storm investors are worrying about now.

The beginnings of that trend were apparent in yesterday’s services survey. With labour in short supply, many employers have begun raising wages to attract staff.

That’s adding to a fast-rising set of costs. Commodities prices, for instance - typically linked to inflation - are on the up. The price of brent crude, the global price benchmark for oil, rose above $70 a barrel on Tuesday for the first time since March, extending a rally which has seen the price rise 30% this year.

Meanwhile, in manufacturing PMI surveys released earlier this week, producers exhibited similar levels of growth to service companies, but also reported concerns over supply bottlenecks. Italian and Spanish factories warned of product shortages and inflationary pressures as they struggled to ramp up production to meet demand. A mismatch between demand and supply would exacerbate any inflationary concerns.

Given this backdrop, it’s natural that investors should watch May’s round of US employment data - due later today - with eagle eyes.

Signs so far are positive. Yesterday, US jobless claims hit a pandemic low to 385,000, down 20,000 from the week before.

Similar news emerged here yesterday, with reports that the number of UK workers on furlough has dropped by more than 880,000 over May. KPMG, meanwhile, reported that UK companies hired permanent staff at the fastest rate for 23 years over the month.

All this is, despite the concerns, very good news. That more people are finding work is clearly positive. The concerns only build when job supply exceeds demand.

This could be yet another worry for investors to deal with. Rather than constantly looking for the bad news amid the good, it’s probably best to accept some kind of inflationary pressures in the short term, and so position your portfolio slightly more defensively. That usually means being well diversified across asset classes, geographies and investment styles. You can find out more about how to invest in a higher inflation world here.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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