CPI inflation hits 6.2% in February – what do investment experts say?

by | Mar 23, 2022

Inflation hits yet another thirty year high as ONS reveals February CPI reached 6.2%, exceeding many economists expectations and reaching its highest level since March 1992

According to the ONS report out today, the largest upward contributions to the February 2022 CPIH 12-month inflation rate came from housing and household services (1.39 percentage points, principally from electricity, gas and other fuels, and owner occupiers’ housing costs) and transport (1.26 percentage points, principally from motor fuels and second-hand cars). With CPI now more than three times the Bank of England’s inflation target, there are clearly massive implications for policy makers as well as for ordinary citizens just trying to make ends meet.

But what do investment experts think of today’s announcement? We’ve gathered some opinions to help shape your thinking:

Colin Dyer, Client Director at abrdn, commented: “With inflation soaring to 6.2% in February, the Chancellor is now under greater pressure to respond to the cost of living crisis when he delivers his Spring Statement later today.

“The Bank of England is suggesting inflation increases could hit double digit figures later this year, and despite raising interest rates last week, the global nature of the issues causing it means this response is likely to only have a marginal effect on households.

“Unless the Chancellor has a silver bullet in the works, many will need to cut back on spending to get by, particularly those relying on their savings like retirees. For those that can, and would be comfortable with a degree of risk, now is a perfect time to explore other options for their savings, looking at what could provide a greater return in the long run. It might feel daunting to invest when the stock market is volatile, but the focus should be on the long-term benefits of investing, including the ability to achieve positive returns to counter inflation.”

Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson, is quick to remind us that we’re still a way off the inflationary peak as she comments: 

“Elevated energy prices are at the forefront of everyone’s minds. The surge in prices has shown little sign of abating and the war in Ukraine is likely to mean energy prices will remain high and volatile. Economists have been quick to revise up their inflation forecasts to reflect current circumstances and annual CPI is not expected to peak until Q2 of this year at 7.5% compared with previous forecasts which expected a peak in Q1. This is in line with the Bank of England’s forecasts and decision last week to raise interest rates a further 0.25% to 0.75%. The BOE has made it clear that it is more concerned about rising inflation than moderating growth. Further interest rate increases are expected over the coming months with money markets pricing in a base rate of 2% by the end of the year.

“Although war in Ukraine has increased risks to both inflation and growth, we should not lose sight of fundamentals which remain strong. Earnings growth in equity markets has resumed an upward trajectory and low levels of unemployment prevail in developed economies around the world.” 

Paul Craig, portfolio manager at Quilter Investors, also points out the tricky situation Chancellor Sunak now finds himself in as he comments: 

“On the morning of Chancellor Rishi Sunak’s Spring Statement, the UK has once again posted inflation numbers not seen for 30 years. Inflation hit 6.2% in the year to February 2022, with the biggest contribution coming from the soaring energy, fuel and food prices, among others.

“Last week the Bank of England hiked interest rates for a third time up to 0.75% to battle soaring inflation, which it now expects to hit 8% later this spring. Many are already feeling the squeeze financially, yet there is no doubt much worse to come considering we are facing a major cost-of-living crisis alongside other fiscal pressures.

“All eyes will be on the Chancellor today as he presents his Spring Statement and announces measures the government will take to tackle the ongoing cost-of-living crisis. This morning’s inflation data shows just how dire the situation is, and there is a clear need for the government to act to help save many from slipping into financial difficulty as their wages are quickly swallowed up.

“Earlier this week and after some hesitancy, Thérèse Coffey committed to reinstating the triple lock uplift on state pensions next year. While necessary given rising costs, the commitment will be costly for the government should inflation continue on its current upward trajectory as expected.

“Markets and developed economies are continuing to battle soaring inflation alongside the uncertainty surrounding Russia’s war on Ukraine. Given the delicate market environment, investors will need to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency will be key.”

“Markets and developed economies are continuing to digest soaring inflation alongside the uncertainty surrounding Russia’s war on Ukraine. Mapping to prior events has been a common discipline, but the truth is that no investors have lived through these exact circumstances. Given this delicate market environment, investors will need to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency will be key.”

Jamie Jenkins, director of policy and external affairs at Royal London also warns of the cost of living crisis which is rapidly hitting UK citizens as he comments: 

 

“Energy costs are pushing inflation to its highest level in 30 years, and energy bills are the expense of most concern to households. Pay growth is relatively strong at a little under 4%, but this is out-paced by the combination of inflation and increased National Insurance Contributions due to take effect from April.

 

“Following two years of extraordinary measures from the Government to deal with the pandemic, we find ourselves lurching towards a cost of living crisis. All eyes will be on the Chancellor this afternoon as he weighs up his options to help.”

Derrick Dunne, CEO of YOU Asset Management, sees the inflationary outlook hanging over us for many months to come as he comments: 

“Way ahead of expectations, the 0.7% increase we see today is a hefty uplift, and further intensifies the pressure for The Bank of England, who just last week revised its forecast for inflation to peak at 7.7% during the second quarter – almost quadruple its 2% target. An additional hike to the base rate is now looking increasingly likely come May, but the Bank must play a careful balancing act to avoid exacerbating the cost-of-living crisis which is already raging across the UK.

“Against this backdrop it’s rumoured that the Chancellor will today announce new measures – including cuts to fuel duty – to help those hit the hardest by surging household costs. Exactly what will come of the Spring Statement remains to be seen, but what we do know is that the spectre of inflation will hang over us for many months yet. For savers and investors, having an appropriately diversified portfolio – with investments able to perform in an inflationary environment – will be the best precautionary measure they can take right now.”

James Lynch, fixed income manager at Aegon Asset Management sees this as just the start of UK price rises which he thinks will continue into 2023 as he comments:

“This rise in prices is more of a reflection of the Covid re-opening story.

“It was a broad based increase in prices of everything from households good (9.3%), food (5%) to clothing (9%). This is about supply chain issues and increasing demand, along with what was actually a modest rise in energy prices. By mid February wholesale Brent oil was $90 a barrel, up from around an average of $80 between October and Jan.

“Oil is now $115 a barrel and this latest move has not yet been reflected in official inflation measures, and along with the Ofgem rise in household energy bills it means unfortunately we are now only at the start of a very painful period for price rises in the UK which may well last all year and into 2023.

“In terms of policy measures by the Bank of England, the latest communication from them is it is of course concerned what this ‘cost of living crisis’ does to consumer demand, and in turn economic growth. On the other hand it will be worried that this type of inflation is not going to be ignored by households and it could be a perfect storm for high inflation expectations to become embedded given the UK’s current robust labour market backdrop.

“If the labour market continues to be tight and we see wages rise then we expect the Bank of England to keep to its hiking path of 0.25% per meeting given the inflationary backdrop.”

Daniele Antonucci, chief economist & macro strategist at Quintet Private Bank (the parent company of Brown Shipley), also sees inflation being likely to accelerate further commenting:

“It’s likely that the data doesn’t fully reflect the impact of Russia’s invasion of Ukraine, suggesting that inflation could rise further. With the exception of transport fuel and some insurance components, which are based on monthly averages, most components of the inflation basket are surveyed during the middle of the month. So, the further inflation pick-up in February mostly reflects drivers that precede the start of the war: strong domestic and global demand pressing against constrained supply.

 “These supply problems are evident in shipping dislocations, shortages of key inputs, and Covid-related disruptions at Chinese ports. This is why, over the coming months, inflation looks set to accelerate further. In addition, surging commodity prices, which are more directly linked to the conflict, will probably add to price pressures.

 “The key takeaway from all this is that surging producer prices driven by global supply shortages and robust demand growth, as well as rising energy costs, have not yet fully passed through into consumer prices. The peak and length of the ongoing inflation spike remains highly uncertain. It’s possible that the annual inflation rate peaks at about 8% in April, when the household energy price cap is increased in response to rising global wholesale energy prices. Thereafter, easing global supply pressures, coupled with slower demand, could perhaps moderate the inflation rate, which is nevertheless likely to stay quite elevated for some time.

 “Risks to the inflation outlook are two-sided. On the one hand, the war could make consumers more cautious, depressing demand and prices more than expected. On the other hand, higher prices could feed into wage settlements and lead to even higher inflation and continued upside surprises.

 “Given these risks, we think the Bank of England will likely continue to normalise its policy stance but, at the same time, soften its rate guidance. In the March minutes, the Bank said that “some further modest tightening in monetary policy might be appropriate” in coming months, a less aggressive formulation than earlier comments. Following these comments, markets have recently lowered their expectations for the Bank rate at year-end to just under 2%. Still, this remains well above our own call of just above 1%.

 “In our view, judging by the Bank’ official guidance, recently reiterated by several members of the Monetary Policy Committee, the balance of risks remain more closely skewed toward a 1% year-end rate than 2%.”

 

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