People hoping for an end to the cost-of-living crisis will have taken little comfort from the latest UK inflation data, with the latest consumer prices index (CPI) figures hitting 9.4%, 0.3 percentage according to the Office for National Statistics.
Households have already been feeling the effects of higher prices, as they have been taking the brunt of a crushing cost-of-living crisis since year-start, but this is also bad news for investors who seek to protect their money from erosion.
Leading the charge was transport costs, which had the biggest impact on the overall rate in the year to June, with fuel prices skyrocketing to 42.3%, while food and energy prices were also at record highs.
The situation looks even bleaker if taken in aggregate with yesterday’s wage growth data, which showed how salaries are not keeping up with such rampant inflation, as Trustnet reported.
Chief executive of YOU Asset Management Derrick Dunne said today’s data was “downright damning” for hard-pressed households.
Yet this picture could get worse before it gets better, as the Bank of England (BoE) forecasted an 11% peak with the end of the energy price cap come October. Some believe even this may be underestimating the full extent of inflation.
Les Cameron, savings expert at M&G Wealth, said: “We now see the inflation peak is going to be higher than earlier predictions. What we don't know is where it will stop and for how long these high rates will be around.”
Neil Birrell, chief investment officer at Premier Miton Investors, added some comfort, noting that inflation “will slow” eventually, but warned that “the hangover will last for some time”.
“It’s a global problem, but each region has its own issues to cope with and the UK has to deal with the obvious squeeze on the consumer, escalating strike action in the workforce and slowing growth, as well as turmoil at the highest level in the government,” he said, noting that it must be “vexing the Bank of England”.
Indeed, others too highlighted that the latest figures will cause a headache for the Bank, which is attempting to wrestle with higher inflation while not diminishing fragile economic growth.
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, noted that, at the BoE’s last meeting, policymakers stressed their commitment to tighten policy more forcefully if they see signs that inflation is increasingly persistent.
“That is exactly what this report has delivered,” he said. “Against this backdrop, it appears clear that the bar has been met for the Bank to increase interest rates by 0.5% in early August.”
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, agreed. He said that inflation “remains on course to top double digits for the first time since the early 1980s”, putting “significant pressure” on the economy and making the prospect of a recession high.
“Nevertheless, the Bank of England is likely to remain in uber-hawkish mode as it attempts to counter the risk of a wage-price spiral developing,” he said, suggesting a 50 basis point rise next month – in line with Gimber’s assessment.
From a saver’s perspective, higher inflation will mean that savings rates and low-yielding bonds will continue to lose money in real terms, with higher interest rates unable to match rampant price increases.
Stock markets have performed poorly as well this year, as growth stocks that had been the drivers of returns for much of the past decade have tumbled, although there have been spots of promise.
Mehdi said: “Despite this difficult economic backdrop, UK equity market performance has been relatively resilient this year with blue chip indices finding support coming from higher commodity prices and exposure to value and defensive names, as well as limited tech sector exposure.”
Matt Roche, Associate Investment Director at Killik & Co, meanwhile said that investors may wish to enter the market now as depressed global stock prices make for an interesting entry point.
“With share prices having generally fallen in 2022, global stock markets now look that much more appealing for lifetime savers,” he said.