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Fund managers react after UK inflation jumps to 1 per cent

19 October 2016

With official numbers rising by more than expected, investment commentators highlight what this means for the economy and portfolios.

By Gary Jackson,

Editor, FE Trustnet

UK consumer prices inflation climbed to its highest level in almost two years in September, the latest official figures show, leaving investors wondering how this will affect their portfolios.

According to the Office for National Statistics, the consumer prices index (CPI) reached 1 per cent at the end of last month – this is a sharp rise from August’s rate of 0.6 per cent.

A rise in CPI in September was widely anticipated, as cheap oil and lower charges in hotels and restaurants caused prices to fall in the same month of 2015.

The ONS reports that rising clothes, hotel and oil prices were behind CPI’s jump last month. The increase was higher than many economists were expecting, however, which may add to concern that UK wages are not rising fast enough to meet higher prices.

But the ONS points out that CPI inflation of 1 per cent “remained low by historic standards”, adding that there have been no explicit signs yet that the weaker pound is driving up prices in shops. The Bank of England argues that it will take up to a year for this to take effect.

UK CPI inflation since 1989

 

Source: Office for National Statistics

In this article, we take a closer look at what the experts think about how the inflation jump will affect investors, the UK economy and monetary policy.

 

IG – “A raft of interesting data in the wake of the referendum”

Joshua Mahony, market analyst at IG, says the rapid pick-up in inflation could offer insight into what lies in store for the UK economy over the coming months and years. He warns that concerns over disinflation could be turned on their head if a weaker pound pushes inflation into overheating territory.

“It is clear that if the pound continues to remain depressed, the problem of disinflation will soon become an issue of overheating, bringing back a scenario where the cost of living far outstrips the rise in earnings. Mark Carney seems willing to allow inflation to overshoot the Bank of England’s target if an easy monetary policy is deemed necessary, yet whether this theory will survive exposure to the real world remains to be seen,” Mahony said.


“It could be the case that we go from Mark Carney sending a letter to the chancellor to explain why inflation is above 3 per cent, just a year or two after sending a letter over why CPI is below 1 per cent, but that is just one small part of our fascinating post-EU referendum world.”

 

Fidelity – “Bank of England is likely to stay in the wait-and-see mode for now”

Anna Stupnytska, global economist at Fidelity International, expects inflation will hit the 2 per cent target in 2017 before “overshooting and peaking sometime in 2018”. However, she does not foresee the Bank making any immediate policy moves.

“Against the forces of sterling depreciation, a Brexit-related slowdown in activity and consumer demand should provide some offset, keeping inflation in check as we move into next year. But these are unlikely to be sufficient to completely counteract the impact from higher import prices,” Stupnytska said.

“While the Bank of England has signalled that they will overlook the inflation overshoot, I believe they will not ease policy further at their upcoming meeting in November. The recent currency plunge has loosened financial conditions significantly while economic data has been holding up, suggesting the Bank of England is likely to stay in the wait-and-see mode for now.”

 

Hargreaves Lansdown – “We need to remember that sterling’s drop is a one-off factor”

Ben Brettell, senior economist at Hargreaves Lansdown, argues that the UK doesn’t look to have too many inflationary pressures, so long as sterling does not fall further, which means it should not be a problem over the long run. He concedes that it could overshoot the target in the short term.

“We need to remember that sterling’s drop, assuming it doesn’t continue to plummet, is a one-off factor, which will fall out of the year-on-year calculation in 12 months’ time. Mark Carney indicated last week that the MPC would ‘look through’ what should be a temporary bout of inflation and keep monetary policy loose to support the economy. In the aftermath of the financial crisis the Bank of England was prepared to tolerate a spike in inflation to more than 5 per cent while leaving rates at rock bottom,” Brettell said.

“The bigger picture is that structurally there are very few inflationary pressures – due in part to demographic reasons. The baby boomers are starting to retire in their droves. They have already gone through their consumption phase – they have bought their houses, cars and consumer goods. The generation behind them is saddled with debt and struggling to get on the housing ladder. There is also no sign of any tightness in the labour market, with wage growth seemingly set to remain depressed. All this should mean less inflationary pressure, lacklustre economic growth, and little upward pressure on interest rates.”

 

The Share Centre – “Overall the picture for UK equity investors looks good”

Helal Miah, investment research analyst at The Share Centre, says CPI still remains significantly below the Bank of England 2 per cent target, but agrees that the chances of another rate cut look diminished for now.


“The Bank has already said it is willing to tolerate slightly higher inflation levels above the target in order to support economic growth and employment levels. We have seen positive impacts of sterling’s fall on the UK economy and UK plc such as Burberry’s results but it is inevitable that the negative side will slowly come through in the data,” he said.

“However, it does not look like the disaster that many predicted prior to the referendum. Interest rates will undoubtedly stay lower for longer, there will be mixed takeaways for sterling’s fall for different UK listed companies, but overall the picture for UK equity investors look good. We therefore believe that the stock market still remains the most attractive asset class from an income and growth perspective.”

 

Architas - “Cash and many government bonds are no longer offering investors a real return”

Adrian Lowcock, investment director at Architas, says investors have to focus on achieving above-inflation returns, even if it does prove to be relatively short-lived.

“Inflation does look set to return.  We are already seeing consumer goods and food producers trying to raise prices and a weak pound is also likely to drive energy and oil prices higher. We would expect the pound to remain weak as Brexit uncertainty weighs on markets, but the difficulty is knowing to what extent rising prices are passed onto customers and therefore how much inflation we will actually see,” Lowcock said.

“UK investors should remain focused on growing their assets above the rate of inflation. As such cash and indeed many government bonds are no longer offering savers and investors a real return after inflation. There are still plenty of options with many equities yielding 3 or 4 per cent, while commercial property and infrastructure also offer attractive yields albeit with varying risks attached.”

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