UK CPI stuck at 3.8% in August has reinforced expectations that the Bank of England will hold rates at tomorrow’s meeting, with further cuts this year looking increasingly unlikely. Food price pressures and the impact of fiscal policy are adding to the stickiness, even as signs emerge that inflation may be near its peak. With November’s Budget set to shape the outlook, portfolio positioning remains a delicate balancing act.
Wealth and asset managers wade in on the recent data and what to expect in the coming months:
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management(JPMAM): “The inflation picture is increasingly ugly here in the UK and, sadly, things may get worse before they get better. Of particular concern is the acceleration we are seeing in food inflation. Household inflation expectations have already been picking up in recent months and there is a real risk that this is worsened by a sharp increase in food prices. It is therefore imperative that the Bank doubles down on its mission to stamp out inflation. A rate cut from the Bank of England this week is almost certainly off the table, with even another cut this year now looking increasingly unlikely absent a more marked deterioration in the labour market.”
Derrick Dunne, CEO of YOU Asset Management, has commented on this morning’s inflation data from the ONS: “The ONS’s CPI measure of inflation held steady in August, which although still too high for comfort, does perhaps give a glimmer of hope that we might be at the peak of the current increases in the pace of price rises.
“That being said there is clear evidence now that it is Government tax policy which has sustained the overall rate at the current level. The biggest contributor to price rises in the month was restaurants and hotels – a sector which has borne the brunt of the National Insurance hike and living wage increases from earlier in the year – forcing businesses to hike prices to cover their costs.
“The clear message in this for policymakers is that hiking more taxes comes with distinct inflationary perils at this juncture. It is the last thing the economy needs – both for households and the state’s own debt structure. Hopefully Rachel Reeves and new colleagues such as Torsten Bell take this carefully into account come November’s Budget.
“Unchanged inflation will likely leave tomorrow’s Monetary Policy Committee decision-making largely unmoved, with a hold expected thanks to the finely balanced economic situation. With clear signs of weakness in the labour market and GDP continuing to falter, it might be the last time we see a hold.
“For more rate cuts though we’ll need inflation to continue to temper as the one-off effects of tax hikes move through the data. Much of this is still reliant on the Government steering clear of fresh inflationary tax rises come November.
“Anyone who is unsure about how this could impact their personal finances should speak to a financial planner.”
Richard Flax, Chief Investment Officer at Moneyfarm said: “UK inflation remained steady at 3.8% in August, matching expectations after rising more than anticipated the previous month. The Bank of England forecasts inflation will peak at 4% in October before beginning to decline, reinforcing expectations that interest rates will be held at 4% for the time being.
One of the main drivers of persistently high inflation is the increase in food prices, with food inflation reaching 5.1% in the twelve months to August. Meanwhile, core CPI, which excludes the more volatile components of energy, food, alcohol and tobacco, and is the Bank of England’s preferred measure – rose by 3.6% in August, down from 3.8% in July.
Compared with the United States and the euro area, where inflation is easing more rapidly, the United Kingdom stands out for its inflationary resilience, a challenge that could dampen consumer confidence.”
Nicholas Hyett, Investment Manager, Wealth Club: “Overall inflation is stuck at nearly twice the Bank of England’s target rate. For poorer consumers the effective rate is probably higher still, since food accounts for a larger proportion of their total spending and food prices have risen 5.1% year-on-year.
Stubbornly high inflation means it’s unlikely that the Bank of England can bail out the economy with cuts. That is doubly bad news for the government, which desperately needs either growth to pick up or rates to come down in order to free up some financial headroom.
The problem is that the current inflationary spike seems to be a uniquely British problem. UK inflation is now appreciably higher than rates we see in European peers or the US, and a lot of that is probably down to own goals on the government’s part. Things like food retail and hospitality employ large numbers of comparatively lowly paid staff, where simultaneous increases to employers’ national insurance and the national living wage have substantially increased costs and led to a corresponding increase in prices. Big increases to public sector pay are also still feeding through sectors like education and healthcare.
Over time those effects will fade. But until they do, inflation is going to remain a source of pain for the government and the public at large.”
Tim Graf, Head of Macro Strategy, EMEA at State Street Markets, reacts to today’s UK CPI data: “UK inflation continues to show signs of stickiness, but today’s CPI data coming in line with consensus and Bank of England forecasts will at least reassure policymakers that the problem isn’t getting worse. Our daily measures of online prices suggest some relief in the pipeline this month, though the positives are not nearly not enough to bring forward another rate cut at tomorrow’s meeting and further easing this year still looks unlikely.”
David Morrison, Senior Market Analyst at FCA-regulated fintech and financial services provider, Trade Nation, comments: “There was little market reaction to the release. The numbers reinforce the expectation that the Bank of England’s Monetary Policy Committee will keep rates unchanged when they meet tomorrow. But the data also raises questions about the likelihood of a rate cut this year. Despite a cooling in the labour market, as illustrated by yesterday’s jobs data, inflation is still close to double the Bank’s 2% target, with no indication that it is about to turn significantly lower. This puts the Bank in a bind, forcing them to leave rates unchanged for now. This may prove good for savers, but frustrating for mortgage holders and other borrowers.”
Chris Beauchamp, Chief Market Analyst at IG,said: “Inflation might still be running at almost double the BoE’s preferred level, but indications of a slowdown in price increases in both services and core inflation provide some hope that any second wave in CPI will be less extreme than the first. But the UK still faces much higher inflation than on the Continent, hampering growth right when the economy needs it most.”
