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Tilney Smith & Williamson: August UK CPI grows faster than expected

Sam Pham, Investment Strategist at Tilney Smith & Williamson, comments on the latest CPI numbers:

What happened?

Headline UK CPI grew 0.7% in August, faster than expectations (0.5%) and higher than the previous reading of 0.0%. On an annual basis, the headline rose 3.2% (expected 2.9%, 2.0% previously). Meanwhile, removing the volatile items such as food and energy, August core inflation rose 3.1% year-on-year, up from 1.8% in July.

What does it mean?

With this August print, UK core inflation has now been above the Bank of England’s target three out of the last four months. Meanwhile, economic growth has actually slowed as evidenced by the July UK 3m/3m GDP release, which came in at 3.6% compared to 4.8% previously.

This slowing growth rates/higher prices macro mix complicates the Bank of England’s job as it calls for contrasting monetary policy outcomes, especially when the Bank is the least tolerant out of the big 4 (Fed, ECB, Bank of Japan and BoE) towards inflation. The next meeting on 23rd September will therefore be particularly important to watch for any shift in policy thinking.

At this juncture, we retain our preference for inflation protected securities to nominal government bonds in our fixed income portfolio.

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