A rise in the rate of inflation could be an early indicator of the reflationary period for the year ahead, according to several fund managers and market analysts.
Figures from the UK Office for National Statistics revealed a stronger-than-expected rise in the UK inflation rate for November, following a surprise fall during the previous month.
The consumer price index (CPI) rate increased to 1.2 per cent in the year to November, above analyst expectations and the highest rate since October 2014.
The rise in the CPI rate was fuelled by increases in prices of clothing, motor fuels and “a variety of recreational and cultural goods and services”.
CPI increases over 5yrs
Source: ONS
November’s rise in inflation is likely to have been fuelled by the slide in sterling since the UK Brexit vote earlier in the year, while other inflationary factors such as rising oil prices are starting to have an impact.
Ruth Gregory, UK economist at Capital Economics, says components of CPI more sensitive to a decline in sterling were a “major upward influence on inflation”.
“The pick-up in UK CPI inflation from 0.9 per cent in October to 1.2 per cent in November was in line with the Bank of England’s November projection and slightly above the consensus expectation of 1.1 per cent,” she said.
“While it will take some time before we see the full effects of sterling’s depreciation on consumer prices, the breakdown showed that components that typically respond more quickly to exchange rate movements, such as petrol and food prices, were a major upward influence on inflation.
“Erratic factors provided a large boost too. The volatile clothing component helped to drive core (ex. energy, food, alcohol and tobacco) inflation up from 1.2 per cent to 1.4 per cent in November.”
Graham Spooner, investment research analyst at The Share Centre, added: “What is most important is that UK consumers, especially just ahead of the biggest and most crucial spending period of the year, are unlikely to feel restricted in their spending. However, on reflection for the year ahead, rising inflation may start to effect spending patterns.
“This latest piece of data confirms the widely held expectation that the weaker pound and higher oil costs are having a notable impact and so it remains likely that consumer inflation will continue to rise over the next few months.”
Indeed, the move towards higher inflation is likely to continue into the New Year, with further inflationary factors likely to take hold.
Tommaso Mancuso, head of multi asset at Hermes Investment Management, said: “The base effect of rising oil prices and the currency impact alone should cause inflation to accelerate for the best part of 2017.”
“As stated, the Bank of England is likely to look through the anticipated inflation overshoot and therefore not expected to respond in the short term.
“The renewed prospects for fiscal policies as well as the potential central banks’ tolerance for temporary higher inflation, could amplify this inflation cycle beyond 2017. Hence, we continue to seek the most attractive assets to provide inflation protection.”
Capital Economics UK economist Gregory adds that a rise in inflation is unlikely to trouble the UK central bank too much, having already highlighted inflationary pressures facing the economy.
She said: “Overall, we think that CPI inflation will breach the 2 per cent target in spring 2017, peaking at just under 3 per cent in early 2018 once the indirect effects of sterling’s fall has had time to feed through.
“That said, we don’t think that the expected overshoot of the 2 per cent target will be too much of a headache for the MPC [Bank of England’s Monetary Policy Committee].”
Shilen Shah, bond strategist at Investec Wealth & Investment, added: “Given the upward pressure on inflation, the Bank of England’s move towards a more neutral policy stance is understandable given that it has indicated that its patience for inflation to overshoot the 2 per cent CPI target is limited.”