Wealth managers will be scratching their heads at these latest data today. Counter to most experts’ expectations that the UK would see another (small) fall in the rate of CPI inflation for December, today’s announcement from the Office for National Statistics (ONS) has revealed that UK inflation actually rose in December to 4%, from 3.9% in November. Still well ahead of the Bank’s 2% target and clearly not good news.
Just as it seemed we were beginning to think that the inflationary beast was being tamed to a degree, these new data have dashed hopes of economic recovery and cuts to base rates. Whilst it seems that the culprits behind today’s shock increase are related to rises in tobacco and alcohol, the prospect is also looming large of supply side problems caused by transport issues through the Red Sea which hasn’t yet taken effect in the data but which we are seeing playing out each day on mainstream news media. Having said that, news of the inflation rise is in tune with the fortunes of some other countries who’ve reported their latest inflation data, including the US, and many European countries like France and Germany.
The question on our minds is what might today’s inflation rise mean for wealth managers, for investment decisions and, of course, for all those people and businesses who are struggling with the cost of living crisis? Investment and economics experts have been sharing their thoughts with us this morning as follows:
A pause for breath for inflation, before the economy blossoms in spring according to– Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments:
“The ONS’s announcement of December’s inflation data confirms a pause for breath following sharper declines than expected in the two months prior. The monthly headline rate of CPI edged up by 0.4%, the same rate as November, a consequence of retailers increasing prices following the Black Friday sales, but this rise disguises continued falling food prices seen across autumn. Although prices are still rising in aggregate and remain above the Bank of England’s desired 2% target, the general direction of travel indicates that the economy will begin to blossom again as winter turns to spring.
“When the Bank releases its overhauled forecasts, estimates will likely reflect this encouraging trend in domestic price pressures. This data has come too soon to capture any potential upside risk associated with shipping disruptions in the Red Sea, but this will likely be reflected in next month’s figures and will likely make little more than a marginal difference.
“The Bank’s rate-setters will take heart from the strong likelihood that price pressures will continue to subside in the months to come. Energy regulator Ofgem is also expected to deliver a sharp drop in the utility price cap in April, which will ease pressures on British households and may well be sufficient to drive inflation down to target far sooner than the Bank’s current expectations.”
George Lagarias, Chief Economist at Mazars comments: “It should be no surprise that British inflation rose in December. Similar data from the US and the EU as well as other forward-looking reports have suggested that prices were ripe for a rebound.
“Price rises are a symptom of persistent geopolitical instability and competition, a theme that will likely stay with us for most of the year. Having said that, we don’t have enough data yet which would suggest a major third inflation wave. We believe that we are now finished with the linear drop in inflation and entering a phase of more volatile price movements.
“Inflation numbers from the US, UK and EU should pour some well-deserved cold water at buoyant traders who are pricing rate cuts in the first quarter of 2024 and help bring market inflation expectations back to planet earth.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown commented:
‘’Frustration is in the air as UK inflation continues to prove stubborn. The slight rise in the headline rate to 4% is the last move companies and households wanted to see, as it pushes the prospect of interest rate cuts further down the line. There had been high hopes that with fuel costs falling and food price rises slowing, the headline rate of inflation would keep easing. However, rises in tobacco prices due to increases in duty helped pushed back up the headline rate. Although the cost of raw materials did fall by 2.8%, the cost of goods leaving factories ticked up by 0.1%. With inflation still double the Bank of England’s target, policymakers are still likely to stay ultra cautious about the prospects for interest rate cuts this year. Worries are still swirling about the effect on prices of delays to goods arriving from Asia, given that attacks in the Red Sea are disrupting around 20% of global shipping. The tight labour market here in the UK will also be a cause for concern, despite signs that wage growth is easing. Downwards pressure on inflation is still expected, with the World Bank forecasting global growth to slow, and the UK economy at the edge of recession, this should act as a further drag on demand. But the Bank of England is not expecting inflation to reach 2% until the end of 2025. So, although cuts are being eyed in 2024, more patience will be needed.”
Richard Carter, head of fixed interest research at Quilter Cheviot, said:
“UK inflation came in at 4.0% in December, joining the US and Europe with a disappointing uptick compared to the 3.9% level seen in November. Though this increase does not take the figure drastically higher, it shows that the UK’s battle against inflation is not yet over and the situation remains precarious. The festive season saw alcohol and tobacco lead the way as drivers of this uptick, while the largest downward contribution came from food and non-alcoholic beverages.
“Though inflation has risen, the latest GDP figure left the UK teetering on the edge of a technical recession and the labour market is showing signs of weakening, so there is no doubt that the Bank of England will continue to face increasing pressure to begin cutting rates. What’s more, the falls in inflation prior to December have also started to take effect on pay, with total pay growth slowing more than expected to 6.5% in November, down from 7.2% in October, which will only exacerbate this further.
“Not only has the headline rate of inflation seen an unwanted uptick, but Core CPI (excluding energy, food, alcohol and tobacco) still remains relatively high. Core inflation has been falling much more gradually than the headline figure and now sits at 5.1%, holding steady at the same rate as November. Progress here is likely to be slow, so the Bank may resist making rate cuts until it returns to a more palatable level.
“Significant global headwinds also remain, not least the events in the Red Sea which could have a considerable impact on consumer prices in the coming weeks. So, whether the Bank buckles under the pressure and begins cutting rates sooner than it might have originally liked remains to be seen.”
This 4% inflation spike throws recovery route into doubt, according to Professor of Global Economy and Deputy Dean of Cranfield School of Management, Joe Nellis as he comments:
“Today we have seen a surprise rise in inflation today to 4% . But the big question is what does the road ahead look like? While domestic factors affecting inflation are largely in the rear-view mirror, more twists and turns are appearing on the horizon. There is a danger that international conflict and supply chain bottlenecks in the Middle East will continue to increase inflationary pressures, making the Bank of England’s job of navigating a route to economic recovery even tougher. In turn, this will put more pressure on household budgets.”
James Lynch, fixed income investment manager at Aegon Asset Management:
“Inflation forecasts are almost inevitably going to be incorrect, it’s just by how much.
“Today’s UK CPI numbers missed to the upside. Headline CPI came in at 4.0% after being expected to drop to 3.8%, the main outlier appears to be Airfares which jumped over 50% month on month. The interest rate market has made an adjustment in near term expectations of BoE cuts. We had been pricing nearly 25bp cut for May 2024, this has moved now to just 16bp after the print. For the whole of 2024 as of 1st Jan the market had been expecting 170bps of cuts, that is now just 115bps.
“I still would expect inflation to look a lot different after April with a mechanical shift down in inflation due to energy price changes, a CPI of below 2% is conceivable. A below target inflation number against the backdrop of 0% GDP growth and we could see market pricing becoming more aggressive to cuts once again and May will be a live meeting. It appears market forecast as well inflation forecasts are inevitably going to be wrong, it’s just by how much…”
Derrick Dunne, CEO of YOU Asset Management, says: “The surprise uptick in inflation this morning will be a bitter pill for both the Bank of England and the Government to swallow. Both have been banking on seeing price rises continue to ease but clearly this isn’t happening with price rises persisting around 4% year-on-year.
“On top of the headline rate – which largely saw a rise thanks to increasing tobacco and alcohol price rises – core inflation has also remained stubbornly high for some time which will be a major concern for the rate outlook from the Bank of England, despite some food price inflation relief for consumers.
“There is a real worry for policymakers here as it is likely to reinforce ongoing job market wage demands, despite signs of cooling in this area. It is looking increasingly unlikely we’ll see a base rate cut in the first half of this year, which markets won’t be hugely happy about and mirrors inflation developments in the US.
“That being said, it is essential for investors to be prepared for the shift in economic narrative that is still likely to arrive this year. An appropriately diversified portfolio, underpinned by support from a high-quality financial adviser, is the best approach during these times.”
Michael Browne, Chief Investment Officer at Martin Currie, on UKI CPI data
“The UKI CPI came in at a surprisingly high figure for December of 0.4% month on month and 4.2% year on year. Whilst this is a set back after the downward surprise in November, the cause is an acceleration in services inflation, in line with the continuing pick up in optimism in the sector as seen from the PMI data. Also rising sharply are travel costs, driven by tube, train and plane ticket price inflation while rentals costs are not yet falling.
“Whilst this month’s figures reverses last month’s downward surprise, the trajectory remains down and this will accelerate as we move to the spring and utility bills are cut, in line with the price falls we have seen at the petrol pumps. But this will worry the MPC and will enable them to sit on their hands for a longer period, exactly the strategy they prefer. The market may push out the first rate cut to Q2 from Q1 and we will see the interest rate sensitive sectors of the housebuilders and banks react accordingly in the short term. We would use any weakness here and in the consumer sector as a buying opportunity. The direction of inflation is clear but as ever one-month statistics can and will surprise.”
