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Is “an economic storm brewing”? – Industry experts comment on UK inflation figures

In response to the latest UK inflation figures, six financial and investment professionals share their thoughts and discuss the implications. 

Neil Messenger, Director of Client and Markets at 1825, comments:

“After unexpectedly exceeding the government’s 2% target in May, there now appears to be no stopping inflation – rising to 2.5% in June.

“And with each step out of lockdown comes another boost to consumer confidence and demand – so the fast approaching ‘freedom day’ is likely to push that figure even higher.

“The Central Bank has done its due-diligence and sought to calm fears about inflation. However, they’ve also made it clear that they plan to let it gradually subside rather than take action.

“With no way of knowing how long this could take, we would encourage those with savings to act now to do what they can to beat rising inflation. This might seem particularly hard in a low-interest rate environment, but there are options out there to help make your money work harder for you.”

Derrick Dunne, CEO of YOU Asset Management, warns “an economic storm is brewing”. Derrick continues:

“As UK consumers continued to welcome the easing of restrictions, there were widespread upward contributions in June across transport, recreation and household services in particular. With the 19th of July now formally confirmed for our full ‘unlocking,’ we can expect demand to continue to surge in the weeks and months to come.

“Indeed, the question still for UK economists is just how high inflation will rise, with some predicting a peak this year of up to 4% – beating even the official forecast of 3%. This would unavoidably result in a sharper and/or faster rise in rates than first expected, and investors should look to protect their plans against this possibility whilst also embracing the economic recovery.

Derrick concludes that the “data leaves us in no doubt at all that for UK consumers and the Bank of England, inflation will remain a force to be reckoned with.”

Ben Lord, manager of the M&G Inflation Linked Corporate Bond Fund, comments:

“There was little controversy among investors at the start of this year that we could expect to see some higher inflation prints during 2021.  I think it’s still too early to tell whether these higher inflation numbers are part of a more structural increase to inflation, though [yesterday’s] 2.5% print nudges the balance in favour of that view.

“I think there are two things we need to see before we can really answer that question: first, how the service sector unlocks and what more permanent changes we may see from the pandemic; and, second, how the UK’s fiscal response evolves (will it, as Biden has chosen in the US, be a policy of growing into our debt burden, or will it be austerity?).

“We may get clearer answers to those questions over the second half and into 2022: then, too, I can take a view on whether UK inflation valuations are expensive, or rather entering a new, higher-inflation regime.  For now, I think the BoE will remain similarly patient before acting.  Until markets get more clarification of what central banks mean by “transitory” and “persistent”, they will continue to struggle to predict central banks’ actions.”

Robert Alster, CIO at Close Brothers Asset Management, comments:

“Inflation is likely to oscillate in the coming months as the economy starts to see the benefit of next week’s removal of social restrictions coupled with resulting labour supply shortages.

“In ‘normal’ times it’s possible that the Bank of England might consider deploying tools to keep a lid on inflation over the summer. But these are not normal economic times. With the Furlough Scheme coming to an end, and the possibility – hopefully remote – of social restrictions being reintroduced towards the winter – the Bank will be keen to hold off from making any decision on interest rates unless inflation looks like it’s rising too quickly.”

Kel Nwanuforo, investment consultant at Asset Intelligence, comments:

“Yet another monthly data release has brought with it news of higher inflation. The recovery in the labour market, coupled with a series of stubborn supply-chain disruptions resulting from the pandemic, have combined to push prices higher.

“The latest noises from the Bank of England suggest that the MPC remains relaxed, believing that inflation will fall back again as the economy gradually returns to a more normal state. This does appear to be the likeliest scenario but policymakers will no doubt be keen to avoid inflationary psychology taking root among consumers before that time.

“[The] figures underline that it remains critically important for savers and investors to ensure that they have strategies in place which can protect the real-terms purchasing power of their capital.”

Rupert Thompson, CIO at integrated wealth management group Kingswood, summarises the UK inflation figures and notes the pressure inflation is putting on the Bank of England. Rupert comments:

“UK inflation picked up considerably more than expected in June, rising to 2.5% from 2.1%. The core rate of inflation also climbed to 2.3% from 2.0%. These numbers will undoubtedly increase inflation nerves at the Bank of England even though a rise to 3% later in the year is already expected. Andy Haldane, the Bank’s recently departed chief economist, only recently warned of the danger of inflation hitting as high as 4%. This data also comes hard on the heels of yesterday’s news that US inflation rose to a higher than expected 5.4% in June.”

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