The latest ONS March inflation data published this morning has revealed that, for the second month in a row, the CPI inflation numbers have come in worse than economists expectations. They’d predicted the rate to fall below 10%. However, the figure for March remained in double digits, with prices rising by10.1% over the previous twelve months – largely driven by eye-wateringly high food costs.
Investment experts and economists have been sharing their reactions to today’s news, their outlook for what it might mean for base rates and the implications for portfolio construction as follows:
Nathaniel Casey, Investment Strategist at Evelyn Partners, comments:
“Despite March’s data surprising on the upside, inflation momentum remains on a downward trajectory. In monthly terms, headline CPI accelerated by 0.8% in March while the headline annualised rate has decreased slightly due to base effects. Last week the Bank of England’s (BoE) chief economist Huw Pill noted that the path of inflation may be bumpier than expected in the short term but is likely to fall in the second quarter due to strong base effects in the energy sector.
“Looking at the contribution components to inflation, the largest upward influence can be attributed to food and alcoholic beverages with bread and cereals accounting for the largest upward contribution in this category. This subset exhibited its highest annualised inflation rate since the series began in 1989. On the other hand, the largest downward contributions came from transport, particularly motor fuels, with petrol pump prices falling for 4 consecutive months, returning to levels last seen in February 2022.
“The labour market has started to show signs of softening, with the unemployment rate ticking up slightly to 3.8% in February and job vacancies falling for 10 consecutive months. Despite this, vacancies remain 35% higher than their pre-pandemic average and wage growth continues to remain persistent. The latest data shows that the monthly rate of earnings growth reaccelerated from 0.3% in January to 0.6% in February. The risk is that rising wages will feed through to inflation, causing it to become entrenched.
“Although inflation remains elevated it has realigned with its downward trends. Additionally, Inflation should decelerate at a faster rate through the second quarter as large rises in energy prices from last year drop out of the annual comparison. Nonetheless, inflation still has a long way to go to return to the BoE’s mandated target of 2% and wage growth rates are currently higher than would be consistent with this level. As a result, it’s likely that the BoE will continue to hike interest rates, with the futures market currently anticipating a terminal rate of 4.9% in the third quarter.”
Marcus Brookes, chief investment officer at Quilter Investors said:
“Having surprisingly jumped last month, inflation has once again started its slow march down from the double-digit growth we have become accustomed to. However, we are still not below the 10% mark, a level we have not been at since August, what now seems like an age ago. This inflation problem is persisting and the fact is it remains at eye watering levels. With fairly punchy estimates and the government hitching its wagon to halving inflation by the end of the year, it will be hoping it falls at a faster rate than just a few decimal percentage points each month.
“Nevertheless, consumer confidence is beginning to return and the economy may not be as harmed by this cost of living crisis as first feared. For as long as the economy can hold up, the Bank of England will keep the option of interest rate rises firmly on the table. With the headline rate of inflation eventually coming down to hopefully more palatable levels, there will be an increased focus on what is going on under the bonnet with core inflation. This measure failed to shift in March and this will be a real concern to the BoE. Should that fail to fall meaningfully in the next couple of months, then more aggressive monetary policy from the BoE may be required yet again.”
Luke Bartholomew, senior economist, abrdn, said: “With underlying inflation pressures proving more persistent than the Bank of England expected, we now think a further 25bps increase in Bank Rate is likely in May. “The May policy decision has always been finely balanced, but the combination of the ambivalent signals from yesterday’s wage data and the strength of inflation today means that the majority of policy makers will probably feel that more tightening is required.
“However, inflation is still set to fall rapidly this year. Powerful base effects will almost automatically significantly reduce inflation, while ongoing economic stagnation will also weigh on inflation. As such we think interest rates are unlikely to remain elevated for a sustained period of time.”
Derrick Dunne, CEO of YOU Asset Management, commented: “The ONS shocked markets this morning by reporting a CPI reading of 10.1% in the 12 months to March. The general expectation had been that the figure would grow by just 9.8% – dipping into single digits for the first time in many months.
“On a monthly basis, the largest downward contribution came from motor fuels, however the upward pull from food – possibly triggered by fruit and vegetable shortages – will most certainly be one to watch as we move through the coming months.
“Today’s data makes Jeremy Hunt’s claim that we’ll hit 2.9% by the end of the year look very ambitious. The hope now is the next inflation reading will start to show materially lower levels of inflation as energy price falls really begin to feed through. But this is little comfort for households facing a major price shock to other aspects of their budgets such as food.
“The big question here is what the Bank of England does next. Initially there had been an expectation that we’d see a final 0.25% rise come May. But inflation, particularly the core component, persisting higher for longer leaves the Bank of England will little option but to keep hiking, no matter the economic outlook.
“For us to see rates coming down we’ll need to see inflation drop significantly in the next few months. This will support the economy but the incredibly delicate balance policy makers now find themselves in is painfully clear.
“For now, investors would do well to prepare for all eventualities, and focus on diversification as a means of maintaining a resilient portfolio.”