Sarah Giarrusso, Investment Strategist at wealth manager Tilney Smith & Williamson, comments on the publication of the latest inflation figures from the ONS and UK CPI data
UK January annual CPI inflation came in at 5.5% (consensus: 5.4%) versus 5.4% previously. The underlying core CPI inflation (excluding energy, food, alcohol and tobacco) increased slightly to 4.4% (consensus: 4.3%) versus 4.2% previously.
The annual headline inflation rose to a new 30-year high. Increased goods prices continue to be a key driver of this headline figure. Food and non-alcoholic beverages rose by 4.3% over the year and there was also a surge in clothing and footwear, increasing 6.3% from a year ago and furniture, household equipment and maintenance increasing 8.4%. However, services did slow somewhat increasing 3.2% annually versus last month’s figure of 3.4%.
A continuing trend this month was the elevated annual figure for transportation which increased 11.3%, owing to the supply chain constraints disrupting new and used vehicle prices. Price rises in electricity, gas and other fuels also showed little signs of abating as the annual figure rose 7.1%.
The UK economy remains strong and grew by 7.5% in 2021, its strongest growth post war. However, the Omicron variant has caused some disruptions. The employment data released yesterday showed employment fell 38,000 in January. However, the labour market remains tight with vacancies at their highest level since records began in 2001 and an unemployment rate of 4.1%.
Given this strength and high inflation some economists are expecting the Bank of England (BOE) will have to be more aggressive than currently signalled by MPC members. However, there is cause that the BOE may well take a cautious approach and not raise interest rates at its next Monetary Policy Committee in March. Given growth headwinds from rising energy costs and an increase in National Insurance from April, the BOE could prefer to wait and raise interest rates at its 5 May MPC and several more times in the second half of 2022 so as not to impede the economic recovery.
Strong economic growth is likely to support company earnings and boost optimism for UK equities.