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Pound dips after roaring inflation sparks fresh recession fears and companies pass on more costs to consumers

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

“The pound has dipped slightly lower as worries about a recession have reared up again after UK inflation jumped to the highest level in 40 years.  Soaring energy prices and higher wages are pushing up costs for consumers to eye-watering levels, eroding their spending power further. Inflation risks becoming more embedded in the UK economy due to a spiralling upwards of wages, as firms fight for talent.

“Core inflation, stripping out particularly painful food and energy costs has reached a three decade high, pushed upwards by price rises across the hospitality and recreation sectors.  With the spectre of stagflation looming, there are expectations that the Bank may be forced to take more of a softly-softly approach to rising interest rates further with the risks that a very aggressive policy risks tipping the UK into a deeper downturn. Yesterday sterling was nudging $1.25, this morning it’s dipped below the $1.24 mark.

So far companies have succeeded in passing on higher costs to customers keeping margins resilient, but worries do linger about just how long consumers will continue to pay the price. Premier Foods is one firm which for now is using its pulling power of brands like Mr Kipling to keep customers loyal but it’s also helped by its value proposition of its products like sauces to make quick meals which are appealing as the cost of living crisis bites.

“It’s hiked profits and dividends beyond forecasts, pleasing investors with the share price rising more than 2% in early trade, but with fresh price hikes on the way, there will be concern that shoppers might be forced to replace shopping basket favourites with even cheaper products from rivals.  

“The FTSE 100 was adrift in early trade with little sense of direction as investors digested the implications of rising prices on consumer behaviour and demand for goods.

“The price of oil is still elevated, edging back above $113 dollars a barrel as traders mull geopolitical factors weighing on supplies of crude. Russia had already warned of unspecified consequences if Sweden and Finland join NATO and now both countries have applied to become part of the alliance, markets will be alert to fresh provocations from Russia including the risk that energy becomes even more weaponised.’’

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