Data released from the ONS today has showed that UK inflation hit 10.1% in July – a higher rate than many were expecting. Given that the Bank of England has recently warned that it sees inflation peaking at 13.3% in October, we’re clearly not at the end of this highly damaging inflationary spiral quite yet.
But what does this latest data mean for the business of investment? Investment managers and other experts have been sharing their views with Wealth DFM magazine as follows:
Richard Carter, head of fixed interest research at Quilter Cheviot comments:
“The pressure on consumers has risen once again with yet another increase in inflation. The UK consumer prices index rose sharply last month coming in at 10.1%, up from 9.4% in June as high energy and food costs continue to mount.
“With utility bills set to increase again in the autumn, with predictions suggesting the energy price cap will rise to more than £3,000 in October, there is still some way to go before we reach the peak in UK inflation. In its latest announcement, the Bank of England said it now expects inflation to peak at just over 13% in Q4 2022, a significant jump on its previous forecast of 11%. As such, the Bank is likely to respond at its next monetary policy meeting with yet another 50 basis points interest rate rise in an attempt to combat it.
“As it stands the cost-of-living crisis is not going to be a short-lived affair, and the road ahead for consumers remains incredibly challenging given wage growth is lagging well behind the rise in inflation. Yesterday’s data showed employees saw their pay, excluding bonuses, rise by 4.7% from April to June, though even with this rise they have experienced a real terms cut of 3%. Given these figures are likely already dated, we can expect things to get worse before they get better. As such, there will no doubt be a lot of pressure on the next Prime Minister to help soften the blow and the Bank of England will continue to have a very difficult job on its hands.”
Rob Clarry, Investment Strategist at Evelyn Partners, comments: “UK headline CPI inflation surprised on the upside and rose 10.1% year-on-year (consensus: 9.8%), compared to 9.4% in June. The CPI monthly increase was +0.6% (consensus: +0.4%), compared to +0.8% in June.
“The less volatile core CPI inflation measure, which excludes energy, alcohol and tobacco, rose by 6.2% from a year ago (consensus: 5.9%), compared to 5.8% in June.
“In July UK CPI hit its highest level in 40 years. Unfortunately, it looks set to continue its march higher in the coming months.
“July’s increase was mainly driven by rising food costs. With changes to Ofgem’s price cap in October set to take the inflation rate to around 13%, these are challenging times for UK households. These factors are largely outside of the Bank of England’s control, which means that monetary policy is less effective in tackling them directly.
“One area that the Bank does have more influence over is demand for labour. Yesterday’s data on the labour market implied that it remains tighter than before the pandemic. This has largely been driven by people leaving the workforce through the pandemic due to a range of factors, including Europeans returning home and older workers entering early retirement. The data showed that while nominal wage growth remains robust, real wages have fallen as higher inflation erodes real incomes.
“Although there were some preliminary signs the labour market could be cooling. Labour demand was softer than expected, while the number of available vacancies fell on the previous months. The Bank will continue to watch this data closely as it looks to contain domestic sources of inflation.
“Ultimately, it looks like the Bank will continue to raise rates through to the end of this year, increasing the probability that the UK will enter a recession in the fourth quarter.
“It’s clear that the UK economy faces significant headwinds, which could make life difficult for domestically focussed firms. As we know, the UK stock market derives most of its revenue from overseas, and we continue to advocate favouring those larger global businesses listed in London whilst being more selective in the mid and small cap space, particularly those that are focussed more on the UK economy.”
Rob Morgan, Chief Investment Analyst at Charles Stanley says: “Annual inflation at 10.1% for July came in higher than even the more pessimistic predictions. Inflation now in double digits continues to pile misery onto consumers, especially with inflation adjusted wages falling at the fastest rate in 20 years. With looming energy price rises in the autumn households should brace themselves. These are challenging times and things are poised to get worse before they improve. Pressure on the Bank of England to increase interest rates at a faster pace has just intensified significantly.”
Charles Stanley’s recent research found that two in five UK adults (41%) do not fully understand the impact inflation has on the value of cash savings:
- 10% believe it increases the value of cash savings
- 9% say it doesn’t affect the value of cash savings
- 22% admitted they don’t know what impact inflation has on their cash savings
Mike Owens, Global Sales Trader at Saxo Markets, said: “UK CPI for July came at 10.1%, higher than the estimated 9.8% YoY with the core reading also higher at 6.2% vs 5.9% expected. The immediate market reaction was a 20 pips rally in GBPUSD on the signal more will need to be done by the Bank of England to tighten monetary conditions, with a 0.5% rate rise in September now being fully priced in by markets. The spike higher in sterling has already begun to fade and the double bottom formed at 1.20 this month remains as key support level.”
Steve Windsor, Principal and Co-Founder of Atrato Group suggests looking beyond traditional asset allocation for long-lasting inflation-linked returns as he comments:
“Despite the UK Consumer Price Index reaching a four-decade high, we believe the inflation peak is yet to come. We foresee a spell of above-trend inflation lasting until mid-to-late 2023 at least – _much longer than many market participants anticipate. This means investors will have to seriously rethink portfolio positioning.
“It is clear the elevated inflationary environment will favour a very different set of assets than those that generated strong returns in the period of low rates and low inflation witnessed over the last decade. While high growth, low profit (if any!) technology stocks achieved impressive returns before inflation took hold, they are much riskier assets to hold in a higher cost of capital environment.
“We believe investors could reposition portfolios to focus on real assets, where value is intrinsically linked to inflation. Real estate, infrastructure and commodities are well known for their ability to deliver resilient returns in an inflationary environment. Within these, however, certain assets are better positioned than others.
“In particular, investors should look for assets that can provide reliable inflation-linked cashflows over the long term – _the ultimate safe haven in an inflationary environment. Real Estate assets that are rented out on inflation-linked leases to high-quality tenants, such as large institutional corporates can provide such security. In addition, certain sectors that fulfil fundamental consumer needs tend to be less cyclical and therefore likely to outperform during periods of macroeconomic uncertainty.
“Despite food prices being a key driver of the current high-inflation environment, the grocery sector remains fairly insulated from economic conditions due to the indispensable nature of this household expenditure. The grocery sector in the UK is dominated by large institutional corporates. So far, supermarkets have been able to pass on the majority of their inflationary cost pressure to the consumers and have managed to protect their margins.
“The other real asset sector we like in the current environment is green energy. The green energy sector sits at the confluence of two very powerful investment thematics; structural global energy price inflation and the net zero environmental agenda. Energy prices have soared and become a lot more volatile, and hence more and more corporates are looking to alternative energy generation solutions to source electricity at a lower cost than purchasing from the grid. Indexed purchase power agreements (PPAs) with the corporate to purchase the green electricity generated by solar arrays are increasingly popular as a solution. PPAs typically have an average duration of 15 years with the occupiers of the commercial properties on which solar arrays are installed, allowing long term stable inflation-linked returns.
“There are also opportunities for inflation-linked income in areas like social housing, which is supported by government funding and for which there is an undersupply. This sector also offers a clear social benefit in supporting the provision of appropriate housing for vulnerable individuals. Finding government backed inflation linked cashflows that can be sourced at a pick-up to index linked gilts has become somewhat of a holy grail for inflation savvy investors.
“Should inflation tides remain elevated for the foreseeable future, those investors who cling to the assets that outperformed in the past may find themselves ill-equipped to navigate the potential choppy waters ahead. To weather this inflation storm, investors should recognise that the next period of the investment cycle will likely favour fundamental investing and real assets.”