Investors shouldn’t rest on their laurels when it comes to inflation risk despite the latest data released from the Office for National Statistics (ONS), according to a selection of investment professionals.
It was announced yesterday that the UK’s headline rate of consumer inflation remained unchanged at 0.6 per cent in August, although many economists predicted it would rise slightly as a result of weaker sterling pushing up import prices.
Performance of sterling in US dollars in 2016
Source: FE Analytics
According to the ONS, the rising price of air fare and groceries were counteracted by price falls in hotels and smaller rises in clothing and alcohol compared to last year.
The news comes at a time when central banks have implemented the use of ultra-loose monetary policy in an attempt to boost economies. However, this has been offset by slow global growth due to lacklustre oil prices, ageing demographics and other macroeconomic headwinds.
While the fact that inflation has remained steady will be seen as good news for many investors, a vast majority of industry commentators believe that this will only be a brief respite before inflation begins to rise again.
Here, we round-up the opinion of five industry commentators on yesterday’s inflation figures and their outlook for inflation over the medium term.
Hargreaves Lansdown – “We haven’t seen yet the full impact of sterling weakness”
Ben Brettell, senior economist at Hargreaves Lansdown, says investors cannot come to any hard and fast conclusions from yesterday’s inflation data.
“The effect of sterling’s depreciation will take time to feed through fully into the figures, as businesses gradually adjust to the new environment. Over the next few months existing inventories will be wound down and currency hedges put in place by supermarkets and other importers will gradually start to fall out of the equation. It is only then that the full impact will be seen,” warned Brettell.
“Forecasts suggests the drop in sterling will ultimately add around 5 percentage points to the Consumer Prices Index, but it’s as yet unclear whether that will come via a gradual uptick in the inflation rate over a couple of years, or a shorter, sharper bout of inflation over the coming months. The Bank of England forecasts consumer price inflation will hit 2 per cent this time next year.”
“Recent economic data released suggests the economy is holding up well despite the vote to leave the EU. The picture will become slightly clearer this week with labour market statistics due out tomorrow, followed by retail sales data on Thursday, when the Bank of England is also expected to leave monetary policy unchanged.
Brown Shipley – “Generating inflation is like trying to light a fire in a swamp”
Andrew Brandreth, deputy chief investment officer at Brown Shipley, points out that oil price falls which were counted in previous inflation figures are beginning to drop out of the annual calculation methodology, which is something investors should bear in mind.
However, he says inflation isn’t necessarily a long-term risk.
“Over the next six months it is likely that we will continue to see these trends push inflation higher in the UK with the oil price hitting its low in January 2016. No doubt the general public has noticed the impact at the pump,” he said.
“However, over the long term, we have described future higher inflation levels as “trying to light a fire in a swamp” because it is difficult to see inflation moving significantly higher, when consumers are generally still unwilling to borrow and wage inflation remains relatively low.”
Scottish Friendly – “It is imperative that people are given a reason to save”
When it comes to savers, Scottish Friendly’s Calum Bennie says that the news that inflation has remained the same will provide some relief but warns that this environment is far from ideal for those holding onto cash.
“We have been warned that interest rates will remain low for some time, and the threat of a further cut continues to loom large. As a result, savers need to be careful that any money they are putting away is simply not left to rot while inflation remains ahead of many cash rates available at the bank,” he said.
“All eyes will be on Mark Carney ahead of Thursday’s interest rate decision. It is imperative that people are given a reason to save and more must be done to prevent rates from crashing down to next to zero.”
“However, there are options available for savers through investing in stocks and shares. While risk is attached, there is potential for long-term growth during this period of rock bottom returns on savings accounts.”
Towrie – “Inflation is going to be a story for 2017, rather than 2016”
Andrew Wilson, head of investment at Towrie, says that a halt on inflation means no pressure is being applied on the Monetary Policy Committee to raise interest rates in the very short term. However, he argues that any level of inflation is negative for savers given how low interest rates are.
“It looks as though inflation is going to be a story for 2017, rather than 2016, although there is evidence that weaker sterling is beginning to have an impact already,” Wilson said.
For the moment inflation is providing no pressure on the MPC to raise interest rates, although any inflation at all is still bad news for savers, given the miserly rates available on cash and bonds.
“The Chancellor and the Bank of England will be keen to avoid a “stagflationary” environment in 2017 and 2018, although even that would be preferable to a genuine inflationary pulse, which might require investors to build portfolios entirely different to those they have now,” he warned.
Tilney Bestinvest – “There is little prospect of runaway inflation”
Jason Hollands, managing director at Tilney Bestinvest, says that despite bond yields widening very recently, yields are still low and investors should therefore remain wary of the impact on real returns that holding low-yielding assets will have when inflation begins rising.
“That said, it is important to put this in context: inflation is still some way below the Bank of England’s own 2 per cent target level and while it should break through that level next year there is little prospect of runaway inflation becoming a serious concern in our view as ultimately endless stimulus programmes have led to a build-up in excess capacity in manufactured goods, especially in China, and with the global growth outlook fundamentally weak, it’s hard to see commodity prices returning to bull market levels.”