Skip to the content

Industry experts react to UK inflation rise

17 January 2017

As UK CPI inflation hits a two-year high of 1.6 per cent, FE Trustnet looks at what higher inflation means for investors.

By Rob Langston,

News editor, FE Trustnet

December saw the consumer prices index (CPI) hit its highest rate since July 2014, according to new data from the Office for National Statistics, as inflation continues to grind higher in the UK.

CPI inflation, which measures price movement of goods and services, was up by 40 basis points for the 12 months to December 2016, compared with 1.2 per cent for the 12 months to November.

The UK government body noted that the main contributors to the increase in inflation had been air fares and the price of food, while motor fuels had fallen by less than the prior year.

CPI inflation over 10yrs

 

Source: Office for National Statistics

Meanwhile, the retail price index (RPI) rate of inflation - used to index pensions and index-linked gilts - climbed to 2.5 per cent, 0.5 percentage points higher than November’s figure.

The rise in CPI takes the rate within touching distance of Bank of England’s target rate of 2.0 per cent.

Higher inflation in 2017 was a theme anticipated by many economists and fund managers, however, the pace of change has taken some by surprise.

Azad Zangana, senior European economist and strategist at Schroders, said: “The latest figures were higher than consensus expectations, suggesting inflation in 2017 could be more significant.

“The main factor behind the latest jump was higher energy price inflation, although core inflation - which excludes volatile series such as food, energy, alcohol and tobacco - was also higher than expected at 1.6 per cent.”


Shilen Shah, bond strategist at Investec Wealth & Investment, said the sharp fall in sterling more recently had also played a part in the inflation rate rise, pushing up import prices.

He said: “Import prices themselves jumped by 16.9 per cent year on year and this is a sharp indicator that consumers are likely to be faced with further price pressures in 2017.”

Sterling vs euro over 1yr

 

Source: FE Analytics

However, not all commentators are convinced that the full impact of the fall in sterling has yet to be fully priced into inflation figures.

Ian Kernohan, economist at Royal London Asset Management, said: “The full impact of sterling’s depreciation has yet to be seen, and with nominal wage growth still quite muted, we expect consumer spending to weaken this year, in the face of a squeeze on real household incomes.”

Ben Brettell, senior economist at Hargreaves Lansdown, says the impact of weak sterling is likely to be a “one-off factor which will fall out of the figures eventually”.

“The longer-term picture is one of structurally low inflation – due in part to demographic reasons,” he explained. “The baby boomers are starting to retire and have already gone through their consumption phase – they have bought their houses, cars and consumer goods.”


“The younger generation is saddled with debt and struggling to get on the housing ladder. Workers don’t have the bargaining power over pay they once did, and wage growth looks set to be anaemic at best.” 

Yet, with inflation approaching the 2 per cent target set by the Bank of England, some are beginning to wonder what the central bank’s next move will be.

"As for the Bank of England, inflation remained below its 2 per cent target last month, but the target should be exceeded when next month’s figures are released,” said Schroders economist Zangana. 

“We continue to expect interest rates to remain on hold despite the increase in inflation, as concerns over Brexit are still likely to keep the Bank of England cautious in its outlook."

Meanwhile, investors will be left wondering how to play inflation within the portfolio.

Viktor Nossek, director of research at asset manager WisdomTree, said: “In terms of strategies to play the current environment, gilts look prone to a correction now, with inflationary pressure by no means priced in.

“Conversely, the largest UK equities (and in particular dividend-payers) with global reach look attractive versus domestically-focused stocks, while UK small caps look vulnerable because of the impact a fluctuating pound is having on companies’ ability to price goods and services effectively.”

Tom Stevenson, investment director for personal investing at Fidelity, added: “To stand any chance of achieving an inflation-adjusted real return they’ll need to look past the meagre returns currently offered by cash and instead focus their attention further up the risk spectrum, investing in bonds issued by companies rather than the government or moving into stocks and shares.”

 

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.