UK inflation hits 9% as talk of recession and stagflation mounts – investment experts comment

Although today’s announcement from the ONS that UK’s April CPI inflation has reached a 40 year high was roughly in line with expectations, some of the detail included in the report makes for very tough reading indeed. While electricity prices have gone up by 53.3% in the year to April 2022, gas prices have risen by an eye-watering 95.5% over the twelve month period. If there was any doubt that we’re living through a massive cost of living crisis, these have been dispelled by today’s data. But brace brace, we also must be prepared for further rises as expectations are that we’ve not reached the peak yet and the prospect of double digit inflation looms large.

So what do investment experts think are the implications of today’s latest data and the cost of living crisis?

Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, comments: 

“UK April annual headline CPI inflation came in at 9.0% (consensus: +9.1%), the highest rate in more than 30 years, against 7.0% in March. The underlying core CPI inflation (excluding energy, food, alcohol and tobacco) was 6.2% (consensus: 6.2%) versus 5.7% previously.

“In month-on-month terms, headline CPI inflation rose +2.5% (consensus: 2.6%) vs 1.1% in March, while core CPI inflation came in at 0.7% (consensus: +0.8%) vs 0.9% in March.

“The multi-decade high inflation rate indicates that the UK continues to face supply-driven “exogenous” price shocks. These are linked to events occurring abroad, rather than being led by demand, and is evident in energy, food and traded goods (e.g. car) prices. For instance, lower capital investment in fossil fuels to enable net zero transition and Russia’s invasion of Ukraine have constrained energy supply to raise crude oil and natural gas prices. Higher energy prices have also filtered through into food production and transportation costs, which are then passed on to consumers. Meanwhile, a weaker sterling exchange rate has lifted the cost of tradable goods prices.

“So far these “exogenous” price shocks have been found in higher short-term consumer inflation expectations, rather than over the long term. According to the April You Gov household survey, UK annual inflation expectations over the next 12 months are up to a historic high of 6.0%, but the 5 to 10-year expectation is running at a lower rate of 4.2%. Market rates of inflation expectations derived from inflation-linked bonds also exhibit a similar message.

“Importantly, the tightening labour market does not show the UK is entering a 1970s style upward wage-inflation spiral. While workers are demanding (and getting) higher pay to compensate for a rising cost of living, it is not running away, yet. In the three months to March, total average weekly earnings for the whole economy rose 7.0% from a year ago on a 3-month moving average, higher than the 20-year average of 3%, but it is down from the COVID-led peak of 8.8% in June 2021. Moreover, if bonuses are excluded, regular pay rose by a slower annual rate of 4.2%.

“Nonetheless, given upside inflation risk, the Bank of England is still likely to tighten monetary policy further from here. This increases the probability of slower UK output growth in the quarters ahead. Given this risk, it probably makes more sense to tilt towards large cap UK stocks linked to global growth, like the energy sector, rather than owning domestic-focused stocks. ”

James Lynch, Fixed Income Manager at Aegon Asset Management, said:

“The UK CPI figure out this morning came in at an eye watering 9.0% year-on-year. The well-flagged cost of living crisis is truly among us now.

“According to the ONS this is the highest rate recorded since 1982. This was the month we had anticipated we would see this increase due to the combined effects of supply chain issues, food inflation and Ofgem energy price rises. The annual rate of electricity inflation is 53.5% and gas is 95.5%. The food basket was up 6.7% and, for a bit more detail, margarine and vegetable fats saw the largest increase year-on-year at 22.7%.

“However, street economists had forecast 9.1%, and this is the first time since October 2021 that the CPI number has come in below expectations – the previous 6 CPI prints have come in ahead of forecast by an average of 0.2% each month.

“June is almost a certainty for another BoE policy move to 1.25% after the confirmation of this number and this week’s employment data.”

Patrick Farrell, Chief Investment Officer at Charles Stanley Wealth Management comments: “As expected, headline inflation continued to accelerate sharply in April rising 9% year-on-year – driven mainly by the increases in the bi-annual review of the government’s energy-price cap. Headline and core inflation are expected to continue to rise going into the second half of the year only start easing off only towards the end of 2022, as comparisons with the previous year will capture already-elevated inflation. We are currently in an economic slowdown, with consumers reacting to rising prices by reducing their spending. This should also help bring inflation down.”

Dan Boardman-Weston, CEO & CIO at BRI Wealth Management sees the BoE as being in a rather tricky spot as UK inflation nears 10%, he comments: “UK inflation accelerated to 9% in April, up from 7% in March but slightly behind consensus expectations of 9.1%. The rate of inflation is running at the highest level in 40 years, due to large increases in the cost of energy, housing and transport, with the prospect of further pain to come as food prices continue to rise. The Bank of England is in a really tricky spot, they need to raise rates given that inflation is approaching 10% but they are raising rates into a slowing economy, which will have painful consequences. The significant increases in the cost of living, the national insurance hike and interest rate increases have started to affect consumer demand and sentiment and the economic outlook looks darker than it has for some time. We fear that any tax cuts that are being mooted by the Treasury may be too little too late in order to try and stave off a recession. The war in Ukraine has extended the runway in terms of inflation staying high but a large part of the inflation continues to look transitory in nature and we would caution against raising rates too aggressively. The Bank of England has a difficult balancing act ahead of them and we hope that inflation can be tamed without harming the economy too significantly.”

James de Sausmarez, Director and Head of Investment Trusts at Janus Henderson said: “High inflation burns through all the cash savers have built up, and with prices continuing to rise at pace, those that bury their heads in the sand are going to be the hardest hit.

“British people are quite simply neglecting their futures by leaving such vast amounts languishing in cash. People saving for the long term, for example for retirement, must look to asset classes that can protect their savings from inflation and provide real growth too.

“The UK’s households are sitting on cash savings worth a year and a half of the nation’s entire annual spending. This is very worrying. If they simply kept a prudent 3 months’ income on deposit to cover contingencies, savers could release up to £1.5 trillion and opt for investments, like investment trusts, that have historically delivered far superior returns. Investment trusts can offer not only a superior income compared to cash, but they have also delivered capital gains too. Crucially, shares have an important element of built-in protection against inflation because many companies are able to increase prices and protect their profits when the cost of living is rising, and this flows through to the dividends they pay shareholders. Cash, by contrast, sees its true value gradually evaporate when inflation is so much higher than interest rates.”