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Inflation hits ten year high – investment experts share their views on the likely impacts

Investment experts share their opinions on what today’s inflation data might mean for the UK economy, investors and markets. That’s following the latest inflation announcement from the ONS earlier today that UK CPI has hit an unexpected high of 5.1% in the month to November 2021.

James Lynch, fixed income investment manager at Aegon Asset Management comments:

“This is more than economists and the BoE were expecting by some margin. We are almost getting used to big inflation numbers now, but this will not sit easy with the policymakers at Threadneedle street.

“This is especially the case as it comes straight off the back of stronger than expected labour market news. The unemployment rate is down at 4.2, and wages are rising by 4.3%, again all better than what the BoE had been forecasting.

“Given this is the type of data MPC members were focusing on to make the call to raise interest rates at the 16th Dec meeting, a policy move should have been all but a foregone conclusion. The only reason a move is now not going to happen would be is due to the value in waiting to see how the Omicron wave of infections affects government policy and economic activity in January.

“The reality is, it should not be a medium- or long-term consideration for inflation, if anything it may add to the inflation problem we already have. However I am sure the optics of raising interest rates a week before Christmas, along with a potentially very high covid infection wave which may involve more restrictions on economic activity, is something they are very aware of.”

Commenting on rising inflation and a tough year ahead for SMEs, Andrew Aldridge, Partner at Deepbridge Capital, said:

“As expected, inflation continues to rise gradually with expectations being that it will likely peak around the 5% mark. This further supports our belief that 2022 will be a difficult year for many SMEs across the country who will struggle to fund working capital needs due to the reduced value of their dry powder. It remains critically important that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences are supported, as they will play a vital role in driving economic growth in the post-pandemic world.

“Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. With our EIS funds reaching record levels of funding in 2020/21 it is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.”

Modupe Adegbembo, G7 Economist at AXA Investment Managers believes that the peak is yet to come commenting: “in the short-term headline CPI should dip from November’s print. The resumption of more usual Xmas discounting in clothing prices and softening in oil prices feeding into petrol costs should see inflation slip next month. However, more broadly we expect inflation to increase further in the coming months, particularly as utility prices rise sharply in the next OfGem price cap adjustment due in April 2022. This threatens to raise CPI inflation above our forecast of 5%.

“Today’s print reaffirms the pressures on the Bank of England to increase interest rates to quell potential second round effects of price increases. However, the uncertainty on the near-term outlook is high as result of Omicron and the impact that Plan B restrictions will have on the economy. Given the continued inflationary pressures in the economy, we expect the MPC to take a cautious first step to tighten policy tomorrow, increasing Bank Rate by 0.15% to 0.25% whilst guiding the importance of the evolution of Omicron on the path of future rate rises. Initial financial market reaction saw sterling rise against both the US dollar and the euro.”

Commenting on today’s data which he sees as strengthening the case for a rate rise, Rupert Thompson, Chief Investment Officer at Kingswood, said “These numbers, along with the IMF’s warning yesterday to the MPC against ‘inaction bias’ and the prospect of inflation heading even higher temporarily in the spring, clearly strengthen the case for a rate rise tomorrow. Even so, the uncertainties thrown up by Omicron mean on balance the MPC still looks likely to hold off raising rates until February. “

Sukhdeep Dhillon, Senior Economist at BNP Paribas Real Estate, comments: “Inflation is now a clear and present risk for the UK economy. The figures will place the Bank of England on tenterhooks at a time when they could do with some good news. The hope may well have been that rising prices were transit in nature, but with Omicron spreading and signs of a further supply chain squeeze already showing, that transitory period looks like it’s lengthening.

“There are positive economic signs which should not be overlooked. Unemployment has fallen to 4.2% in October and pay growth has beaten expectations. But the situation is delicate. Concerns about a wage/price spiral loom large and the need for intervention may be unavoidable. Should the economic mood shift to an even more negative mindset, the risk of a fragile economy will become very real very fast. All eyes will be on the Bank of England interest rate decision on Thursday.”

Yesterday’s employment data will be front and centre as the Bank of England meets to discuss tomorrow’s interest rate decision. Doubts about restrictions and their impact on the jobs market have already dashed predictions of a pre-Christmas rase rise. But with inflationary pressure remaining high and with the IMF discouraging the Bank from delaying any further, a change to the base rate is by no means off the table.

“With that in mind, investors would do well to prepare for all eventualities, and selecting investments which track the inflation rate will help to maintain a resilient portfolio.”

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