UK inflation slows to 10.7% – investment experts comment on today’s ONS data

United Kingdom High Resolution Inflation Concept

This morning’s announcement from the Office for National Statistics (ONS) of the November inflation data shows the annual year-on-year CPI rate to November has decreased to 10.7%. Whilst this was below expectations of CPI coming it at around 10.9% and below the October figure of 11.1%, it is still a massive number and shows that prices are still rising at a dramatic rate.

But what does today’s inflation news mean for investors? The following comments from investment experts make it clear that although it is some light relief, it brings little cause for any serious Christmas cheer: Daniel Casali, Chief Investment Strategist at UK wealth manager Evelyn Partners, comments: “Though CPI inflation slowed in November from October, the data has yet to show conclusive evidence that it has indeed peaked. For instance, there remains upward inflation pressure in services: the annual rate for restaurants and hotels was 10.2% in November 2022, up from 9.6% in October and the highest rate since December 1991. “Moreover, core CPI inflation (excluding food, energy, alcohol and tobacco) is elevated and there are concerns that this could lead to the secondary impact of workers demanding higher wages to keep up with the rising cost of living. There is some evidence of this from the labour market statistics released this week: annual regular wage (excluding volatile bonuses) rate accelerated to 6.1% in October for the whole economy on a 3-month moving average, up from 3.6% at the end of 2021. 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. This is a risk that the government has cited in their discussions with the trade unions.  “Nevertheless, CPI inflation should decelerate in 2023, as expected by the consensus of economists. First, 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 significant headwind against accelerating inflation from here. Second, core output Producer Price (PPI) inflation has deteriorated to 13.2% in October, after peaking in the summer at 14.9%. Over time, the lower cost of inputs into production should exert downward pressure on consumer prices. Third, high base effects from sharp price increases in 2022 will make it difficult to sustain high annual CPI inflation rates in 2023. And fourth, the impact of supply chains disruption on creating inflation in the goods market from the pandemic should begin to fade. “Given the current high rate of consumer price rises, the Bank of England will continue to raise interest rates for now, and particularly as inflation is a long way from its 2% target.” Rob Morgan, Chief Investment Analyst at Charles Stanley says: “Inflation slowed a little in November, but price rises continue to take big bites out of UK consumers’ spending power. “To outrun the insatiable inflation monster, you would have had to get a return of more than 10.7% on your money over the past year, no mean feat at a time when rising inflation, and interest rates to quell price rises, have had a detrimental effect on both share and bond markets. “Once again, energy costs were the main factor behind the double-digit inflation figure, with the Ofgem energy price cap expiring in April and replaced with the government’s Energy Price Guarantee. “Mirroring figures across the Atlantic yesterday, the number was slightly lower than expected, cementing the likelihood the Bank of England will ease off the brakes, tightening conditions more gradually with interest rises in smaller increments, and perhaps pausing to digest the economic impact in the New Year. Encouragingly, petrol and diesel prices fell, an inflationary factor that is felt keenly not just by motorists but everybody indirectly through the cost of transport. “Yet like in the US, food and services inflation remained sticky, perhaps giving the Bank of England pause for thought. Food inflation rose from 1.1% in November alone and prices are now 16.4% up on last year, a huge challenge for shoppers preparing for Christmas festivities. “Still, tomorrow’s BoE hike is unlikely to be as aggressive as last month’s 0.75% increase to 3%, with a 0.5% rise now looking more likely. Raising interest rates too much would more of an economic downturn than necessary. In his autumn Budget last month, Chancellor Jeremy Hunt confirmed that the UK is in recession and this, in itself, is likely to hold inflation back as demand cools. “For investors, the prospects for markets will remain volatile over the next 12 months, but inflation should diminish as a market moving factor going forward if it continues to recede. Instead, there will be more focus on the earnings environment and growth prospects, particularly in relation to how severe the growth downturn will be, in terms of driving share prices. “In this context, bonds are looking more attractive as an investment than they have done for more than a decade, particularly safer investment grade corporate debt which should re-establish its traditional role in a portfolio. Equities should also benefit from lower rates, but their resilience will be shaped by the outlook for the economy which may not be rosy.” Jonny Black, strategic director at abrdn said: “This week is a thicket of economic data and developments that clients will be closely studying. “Inflation’s just the start. Tomorrow, we’ll see whether the Bank of England raises interest rates again or if it will stay its hand. “Among all the noise, advisers have the critical job of keeping clients focussed on the long-term view. “As every adviser knows, the road to poor outcomes is often paved with short-term, knee-jerk decisions. This holiday season, maintaining close communication with clients and being ready to answer their questions – on the technical aspects of advice, and their more emotional financial concerns – will be a true gift that keeps on giving.” Philip Dragoumis of Thera Wealth Management says: “It’s too early to call a peak in UK inflation but at least now it is heading the right way. Price rises in restaurants, cafes and bars provided the highest upward pressure in November and the feeling is that companies are still trying to keep their profit margins intact (and even increasing them) by passing on absolutely all input cost rises. We need to see a few more months of data before we call a peak in the rising interest rate cycle but we get the impression that we are not far off. There are reasons to be cautiously cheerful.” Giorgio Vintani, equity strategist at Inflection Point has put a more positive spin on today’s news commenting: “It looks as the Bank of England’s effort to control inflation are finally yielding some results. While we might have seen the peak in inflation this is far from being at normal levels, so the Bank of England will continue to raise rates. Good news. For savers as interest rates are headed higher; borrowers can also hope their mortgage rates won’t raise as much.” James Lynch, Fixed Income investment manager at Aegon Asset Management, said:  “UK CPI for November came out at 10.7%, a large drop from 11.1% in October. This most likely confirms that October 2022 was the peak in inflation. We would expect inflation in the UK to continue to trend lower in 2023 as demand in the economy falls, the supply chain difficulties post Covid are fading away, and the energy prices will not be rising at the same rate of change as they did in 2022.” Taking the view that inflation has peaked, but there is still a long and painful road ahead Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services comments: “After what feels like an eternity of worrisome fiscal news, there is some Christmas cheer to be found in today’s figures which show that UK inflation may have finally peaked. However, at 10.7%, this is still well above the Bank of England’s 2% inflation target, so this is just the end of the beginning for the Monetary Policy Committee. “In October the price cap increase drove a 42.7% uptick in utility prices, but the now-fixed price cap has thrown water on the flames of burning energy price inflation. Food inflation is also moderating, while sterling’s rebound on the foreign exchanges should ensure that other imported inflationary pressures diminish too. “The UK still faces strongly embedded domestic drivers of inflation however, meaning the glass is still half empty in the medium term. Many businesses are meeting pay demands and raising prices to pay for it. Yesterday’s labour market figures showed private sector pay growth sitting at 6.9% for August to October, an increase of 0.3% and higher than the Bank of England would hope. “The Bank will likely respond as per its mandate to manage inflation by further raising its base rate and keeping it elevated for most of 2023. There is still a long and painful road to financial recovery ahead, winding through a stagnating economy and a lengthened recession. But this is a necessary path if the UK wishes to get out of the woods and deal with its stubborn inflation.” Wes Wilks, CEO at IronMarket said: “Bringing a knife to a gunfight, the Bank of England must maintain its aggressive stance for this week’s rate decision at least. The UK economy is so fragile, they will break it, and markets will counter any positive pricing from a lower inflation print with the larger negative effects on the economy of raising rates into a recession. We may be seeing peak rates imminently, which potentially brings UK rate cuts forward to as early as the second half of 2023. Savers, lock in your rates, and borrowers, sit tight.”

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