Following yesterday’s ONS news that wages in the UK were rising at their fastest rate for 20 years, today the ONS has revealed that the UK’s December CPI figure has come in slightly lower than the November level, at 10.5% but still remains perilously close to a 40 year high. While petrol and energy costs have eased, food prices have continued to increase, the ONS says.
But what does this mean for investors? Investment experts have been sharing their views with Wealth DFM as follows:
Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, said:
“The Bank will be glad at falling inflation, but knows it has far more to do. There has been a second slither of good news for Britain, after last week’s data showed the UK had temporarily delayed a recession. Inflation data for December has come out at 10.5%, the second monthly fall from a peak rate of 11.1% in October.
“While undoubtedly a positive step, the Bank’s relief will be brief. Core inflation has remained constant at 6.3%, largely reflecting a continuation of the tight labour market and subsequent strong wage growth. Combined with the economy’s unexpected November growth, we are likely to see several further rate rises before the Bank finally believes it has done enough.
“There is now light glimmering at the end of the inflationary tunnel. But there is still a long way to go. Inflation still far outpaces wage growth, meaning people are still getting poorer. The lagged effect of earlier rate rises are likely to deepen the economic downturn. And the Bank itself forecasts inflation only to return to target by the end of 2024 – making it a rough two-year journey back to economic normality.”
Marcus Brookes, Chief Investment Officer at Quilter Investors, said:
“It appears the peak of this inflation conundrum was reached in October as the data shows price rises have moderated a little. However, for those hoping that inflation would simply just fall out of the system quickly, that is a scenario that is unlikely to come to fruition. Energy prices may be coming down, with petrol at the pump at a much more palatable level than it was before, but services are now driving inflation as companies have had to increase wages just to get staff on their books. We can see in the latest data yesterday that wages are having to climb as people merely try to keep up with inflation, let alone beat it. Combining those cost pressures with the effect that energy prices have had and you have a cocktail for sticky inflation that refuses to budge quickly. It is this that the Bank of England will be fretting about when it comes to how much to raise interest rates at their next meeting. If there are no signs of services inflation cooling off, then we should expect the aggressive strategy from the BoE to remain in place.
“That said, cracks did start to appear in the BoE’s united front at the last rate rise, with six of the nine committee members opting to raise rates by 0.5 percentage points. As we seem to be at a crossroads with inflation, the future rhetoric coming out of the BoE is going to be crucial for markets and investors. While recession is predicted, the UK economy did surprise with a positive GDP reading in November. It could be, therefore, that things are not quite as bad on the economic front as previously feared and that the BoE will keep their foot on the gas. If inflation does not start to fall a little quicker than it is, then any chance of a reversal in monetary policy becomes increasingly unlikely by the day.”
Daniel Casali, Chief Investment Strategist at Evelyn Partners, said:
“Another slowing in annual inflation – the second since October’s peak of 11.1% – will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly GDP growth data. But these are fairly marginal decelerations in prices, inflation remains elevated and together with likely negative annual GDP growth in 2023 this remains a risk for both markets and households. The Bank of England will welcome softening inflation but for its rate-setters the receding of price pressures has some way to go before they take the foot off the rates pedal, and particularly if growth continues to surprise on the upside and if growing wage demands prove successful.
“Inflation is being led down by energy prices, as wholesale gas prices soften and benefit from less drastic annual comparisons. Energy prices started to surge in late summer 2021, well before Russia’s invasion of Ukraine, so wholesale gas prices had already risen above-trend in December 2021.
“High frequency data show the energy effect has further to go: wholesale one-month ahead natural gas prices have now fallen to below the pre-Russian invasion of Ukraine level and are down 10% so far in January. Petrol prices are also declining, with the latest price of unleaded petrol on 9 January at £1.50, down from £1.52 at the end of 2022 and a peak of £1.92 last summer. Expect lower energy prices to exert downward pressure on inflation, at least in next month or two.
“Looking beyond the near term, slowing economic growth, along with higher taxes, rising mortgage rates and less government support on energy prices next year is likely to be a drag on real household take-home pay in 2023. Lower discretionary incomes should prove to be a significant headwind against another upward acceleration in inflation from here. Moreover, high base effects from sharp price increases in 2022 will make it difficult to sustain high annual CPI inflation rates in 2023. Finally, the impact of supply chain disruption on prices in the goods market should begin to fade, while recent sterling appreciation will reduce the cost of imported goods.
“The BoE expects headline CPI inflation essentially to halve to around 5% by the fourth quarter of 2023. Even so, core CPI inflation (excluding food, energy, alcohol and tobacco) could remain fairly sticky. The risk to the BoE’s inflation outlook is the potential secondary impact of workers demanding higher wages to keep up with the high cost of living. With the unemployment rate still near cyclical lows, there is a possibility that higher wage rates become entrenched in the economy, increasing the risk of a wage-inflation upward spiral.
“We expect the Bank’s monetary policy committee to raise interest rates again at its next meeting which concludes on 2 February – most probably by 50 basis points to 4.0%.”
Tom Hopkins, Portfolio Manager at BRI Wealth Management, said:
“UK CPI came in at 10.5% in line with consensus and marginally down from the 10.7% recorded in November. This marks the second consecutive slowdown from a 41-year peak of 11.1% per cent in October and shows the UK has followed the trend of the eurozone and US, albeit the reading is still close to the all-time high figure.
“The fall in the headline Consumer Price Index data has been partly driven by cratering energy prices, offering some comfort to households in the United Kingdom. The potential downtrend in UK inflation could fan expectations that the Bank of England may hint an end to its tightening cycle, but we wouldn’t risk getting too excited, too soon. The annualized core inflation, which strips out energy and food, held firm at 6.3%, the same reading booked in November showing inflation is sticking. We do believe there are further rate hikes to come from the Bank of England if they want to show they are serious about bringing this CPI figure down.”
Hugh Gimber, Global Market Strategist at J.P. Morgan Asset Management, said:
“A cold weather front may have descended on the UK, but there is still little sign of much cooling in recent inflation data.
“When taken in combination with yesterday’s labour market report, today’s inflation print will add to the pressure on UK policymakers to demonstrate that they are serious about tackling price pressures when they next meet in February. Wage growth running north of 6% year over year is not consistent with the Bank’s 2% inflation target, and it is increasingly evident that sectors such as hospitality that are seeing some of the stickiest price pressures are also those that are experiencing the most acute labour shortages. With little hope of a near-term rebound in the supply of workers, a weaker economy that leads to lower demand is likely the only way to bring the labour market into better balance.
“Markets are currently split on whether the Bank’s next rate hike will be 25 or 50 basis points. This week’s evidence would suggest that bold action is required. We expect that interest rates will need to rise by at least 1 percentage point over the coming months – taking interest rates to 4.5% or above – before the Bank is able to consider pausing its tightening cycle.”