On the surface of it, the inflation data published this morning by the ONS might appear to be good news as the headline number dipped back to single figures. However, dig a bit deeper into the detail and there are clearly concerns that inflation is becoming rather embedded in the UK economy with so called ‘core’ inflation causing a particular headache for investment and wealth managers. Concerns abound that the peak for UK base rates might now be further away than was previously thought.
Investment experts have been sharing their reaction to the latest inflation news with Wealth DFM and sharing their outlook on what it all means as follows:
Hugh Gimber, global market strategist at J.P. Morgan Asset Management comments: “A substantial drop in headline inflation is welcome news for policymakers, but a huge upside surprise relative to expectations will certainly dampen the mood in Threadneedle Street.
“Given changes to the energy price cap in April 2022, it was well understood that the contribution from energy would see a leg lower this month. Services inflation gives a much better read on underlying price pressures in the economy due to the close links to the labour market, and the signs here were far more concerning with services prices seeing a very strong 1.6% m/m uptick. As a result, core inflation is now running at its fastest monthly rate since the early 1990s.
“With the next rate setting decision not due until late June, the MPC will get more news on both inflation and the labour market before policymakers meet again. Absent a remarkable turnaround in the incoming data, interest rates now look highly likely to rise by a further 0.25% points in June. The Bank will be hoping that more definitive signs of cooling in the economy over the summer will permit a pause in the hiking cycle. Yet based on the current evidence, both investors and savers should be prepared for the prospect of 5% interest rates later in the year.”
The beleaguered Bank of England has been dealt a crushing blow in its inflationary battle according to Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services as he comments:
“After enduring eight months of soaring inflation, the UK’s headline rate has finally dropped below double digits, clocking in at 8.7%. This long-awaited respite is the only welcome news for an otherwise embattled Bank of England, which only recently saw Andrew Bailey and other senior figures face an intense grilling from MPs on the Treasury Select Committee over its apparent failure to control inflation.
But let’s not forget that a large part of April’s drop is simply down to accounting measures. April 2022 saw energy prices increase by 47.5%. Thanks to the government’s energy price guarantee, this energy surge has now dropped out of the year-on-year equation, leading the comparative inflation rate to naturally fall.
But the real message lies within the fine print. Core CPI, a far more vital gauge for the Bank, has risen by some margin to 6.8% from 6.2%. This is the highest level in over 30 years. While there may be some positive movement on some fronts – producer price data recently revealed that food input prices are on a declining trend, fueling hope that March’s dizzying 19.2% food inflation rate was the high-water mark – this Core CPI print, notably an extremely unwelcome rise in service sector prices, has dealt a crushing blow to a beleaguered Bank. We may still be far from the peak of rate hikes, with another 0.25%-points surely on the table for 22nd June”
George Lagarias, Chief Economist at Mazars comments: “Overall, headline inflation remains uncomfortably high and, what’s worse, increasingly dynamic. This could lead to more than the two rate hikes the market, perhaps optimistically, expects. Until the Bank of England sees evidence of the vicious price-wage cycle breaking and demand conditions sufficiently tame, we should expect increasingly tighter credit conditions and pressures on consumers and businesses.”
Craig Veysey, portfolio manager at Man GLG said:“We expect the latest UK inflation data will make for a very frustrating read for policymakers this morning. While lower energy prices have pushed down yearly inflation to 8.7% from 10.1% previously, everything else about this report points to inflation not yet being under control in the UK.
“In particular, core CPI rose to 6.8% from 6.2% on a yearly basis, led by core goods and services inflation. With the risk of more persistent price pressure and then private sector pay demands increasing too, we’d expect more rate hikes from the Bank of England in the pipeline over the summer. History suggests that a recession, which would increase unemployment and suppress wage demands and inflation, is a course of action policymakers will be grappling with.”
Luke Bartholomew, senior economist, abrdn on the UK’s inflation data comments: “The UK’s April inflation report delivered a very nasty upside surprise.
“Headline inflation fell by less than expected, dropping from 10.1% in March to 8.7% in April compared to consensus forecasts of 8.2%. The drop in the headline rate was almost entirely due to favourable base effects around the energy price increase in last April. But elevated food price growth meant overall inflation fell less than expected. The headline rate should continue to fall rapidly over the coming months as favourable base effects continue to play out.
“But much more concerningly, underlying inflation pressures seem to be picking up. Core inflation increased from 6.2% to 6.8%. And services inflation, the BoE’s preferred measure of underlying inflation, increased from 6.6% to 6.9%, above the Bank’s forecast of 6.7%.
“We now expect the Bank to deliver a further 25bps interest rate hike in June. There is still another labour market and inflation report to be released before the next policy meeting, which could alter the picture again. But as things stand, it is hard to see how today’s ugly inflation report does not meet the data-dependent conditions provided by the Bank to cause another rate increase.”
Rob Morgan, Chief Investment Analyst at Charles Stanley said: “UK inflation has, as widely expected, turned a corner or sorts with CPI falling from 10.1% in March to 8.7% in April. We can now expect a steady descent from multi-decade highs as the largest hump in energy prices passes through the calculations.
“Yet that is where the good news ends. All is not rosy in the UK’s economic garden with inflation coming in consistently hotter than expected, largely thanks to runaway food prices. Exterminating the inflation weed may take time and persistence from the Bank of England, and it may mean households and investors getting used to structurally higher interest rates than they have been used to.”
Daniele Antonucci, Chief Economist & Macro Strategist, Quintet Private Bank (parent of Brown Shipley), said: “While UK inflation did slow more visibly this time around, it only declined to 8.7%, partly driven by very strong food prices and more general price and wage pressures, once again overshooting the Bank of England’s expectation.
“Taken at face value, this makes our base case of extra rate rises ever more likely. With core inflation excluding food and energy accelerating, we expect the Bank to continue to increase its key policy rate over the next few months.
“Even though the UK economy appears to have avoided the deep recessionary scenario many were predicting at the start of the year, we suspect that economic growth will stay weak or even weaken further. The interest rate, inflation and fiscal squeeze on household income and corporate profitability is likely to intensify.”
Richard Carter, head of fixed interest research at Quilter Cheviot said:
“UK inflation has finally fallen from its stubborn double-digit highs for the first time since August 2022, with a significant drop to 8.7% in April down from 10.1% in March. This downward shift was largely due the stabilisation of energy prices, while food prices are beginning to moderate.
“The latest figures come as the International Monetary Fund (IMF) backtracked on its previous estimation that the UK would be the worst performing economy in the G7, instead concluding that it will achieve 0.4% growth in 2023 and will manage to avoid a recession. The IMF’s change of heart was largely as a result of unexpected resilience in demand, with continued government support and falling energy costs each playing a part, though it still predicts inflation will be sticky and does not expect a return to its 2% target for a further three years.
“While this fall in inflation shows things are beginning to move in the right direction, we cannot ignore the fact that there is an incredibly long way to go. Inflation at 8.7% is still eye-wateringly high with prices rising steeply, and we are unlikely to see such significant eases as this in the coming months. Instead, we can expect to see a more gradual decline, particularly if the IMF’s prediction is accurate.
“While the Bank of England has made no promises that it is nearing the end of its hiking cycle as far as interest rates are concerned, it will be relieved to see inflation has finally budged. For as long as wage growth continues to increase, the Bank will keep the option of further interest rate rises firmly on the table – and particularly if core inflation remains persistently high.”
