This morning’s announcement from the ONS has revealed that UK headline inflation has dropped to 6.8% in the year to July 2023. Good news on the face of it perhaps – as it follows last month’s rate of 7.8% – and means the second month in a row that the rate has dropped. But, troublesome core inflation has remained at 6.9% for the year to July, indicating that the UK’s battle with the ravages of inflation is far from over.
Top of the concerns list is that the latest inflation data isn’t enough to prevent the Bank of England’s MPC hiking base rates again at their September meeting from 5.25% which was set earlier this month, to 5.5%. The fragile state of the economy and the cost of living crisis are having a major impact for wealth and investment managers too.
Below we share the reaction from investment and economics expert to the latest inflation data and what it means for asset allocation and stock selection decisions:
A dive in inflation means we are sailing in the right direction, but still far from shore according to Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments:
“Today’s plunge of 0.4% in consumer price inflation represents a positive update for consumers, but continued inflationary pressures elsewhere mean there are still choppy waters ahead for the UK economy. The government will have its eye on annualised inflation, clocking in at 6.8% today, in their hope to see inflation half by December.
“The welcome dip was driven in large part by a reduction in utility prices, caused by the sharp fall in Ofgem’s price cap to £2,075 on July 1st, combined with a decrease in food price inflation and falling petrol prices at the pumps.
“While the ship is sailing in the desired direction, sticky underlying price pressures and uncomfortably strong wage growth show that we are still far from shore. These figures remain too high for the Bank of England’s liking and will likely lead to yet another increase in the base rate come September 21st.”
David Henry, investment manager at Quilter Cheviot said: “With inflation falling to 6.8% and yesterday’s data showing wages increased by nearly 8% over the past year, the cost of living crisis may finally be beginning to wane. Households are still under immense pressures however, and inflation isn’t going to fall dramatically, but it will be pleasing to millions to see their take home pay now seeming to keep up with inflation. However, the headline numbers only tell a fraction of the story. Food prices continue to hit consumers, while core inflation is refusing to budge substantially. With the surprise in earnings growth added in and the economy holding up in the face of adversity, the Bank of England will probably determine that more interest rate rises are required to get the job done.”
“However, the BoE is reaching a tricky point now. Interest rates have been rising for more than 18 months and this is when they traditionally begin to bite on the economy. As a result, given the speed in which rates have reached more than 5%, the toll on the economy in the next few months could be quite severe and may be enough to tip the country into a recession. With the Federal Reserve now increasingly looking like they may now pause interest rates rises, this could naturally feed into the BoE’s thinking given how they have seemingly followed in the Fed’s footsteps in the past. But with inflation remaining especially elevated, and this being the primary reason for rate rises to date, the BoE is left in somewhat of a no-win situation.”
Commenting on inflation falling providing the final part of this week’s UK economic jigsaw puzzle, Charles White Thomson, CEO at Saxo UK, said: “The final part of this week’s UK economic jigsaw puzzle is the key CPI or inflation growth which came in at 6.8%, a small miss on consensus, and down from a recent 7.9%. 515 basis points of interest rate hikes or harsh economic medicine is having its effect with the move down in inflation. The MPC will be mildly pleased with these headlines as the difficult conundrum of reducing inflation, with the blunt weapon that are interest rates, without breaking the economy, at first glance appears to be working. Earlier this week we had GDP, Industrial and Manufacturing production numbers which largely showed a healthy beat versus a depressed consensus. These reports are encouraging and a needed boost for UK PLC.
“At the risk of being a party pooper, we should remember that quarter on quarter GDP growth is an anaemic 0.2%, inflation is 3x the target and the consumer is on their knees saddled with debt that was once ‘given away’ cheap. These numbers need to be built on, as a ‘flash in the pan’ would damage confidence significantly – consistency or stringing together a series of improved numbers is most important. To the jigsaw we add an increase in unemployment to 4.2% which shows the employment market is resilient and tight, and wages are running hot as seen in the 7.8% wage growth. This sort of wage growth is inflationary and will have caught the MPC’s eye. The better than expected GDP number, high wage and inflation growth frees and pushes the Bank of England’s hand to continue the campaign to defeat inflation. Core inflation remains stubbornly high. The view being there is enough resilience in the economy to hike again by 25bps, with peak rates at 5.75- 6.0%. The Governor has reduced his strategic options with the ‘no ifs, no buts’ messaging and that is why the risk for further policy failure or over tightening is real. Forecasting interest rate hike lag is highly challenging.
“We need a monetary policy review, with fresh eyes including generalists, to answer how we got here including ‘how to break the cycle of group think’ amongst the key Economic decision makers. The recent appointment of the distinguished member of the Economics establishment, Ben Bernanke, does not, in my view, represent a fresh set of eyes.”
Rob Clarry, Investment Strategist at wealth manager Evelyn Partners, comments:
“The ONS report showed continued progress on inflation front as CPI came in roughly as expected and significantly down on last month. Despite some concerns over strong wage growth data yesterday, recent economic data has been largely favourable for the Bank of England and its policymakers.
Last week, both GDP and industrial production surprised to the upside, highlighting that the economy remains resilient to higher interest rates, for the time being. This week’s labour market data also showed some promise: the unemployment rate increased from 4% to 4.2% and the number of available vacancies continued to fall. These signs of lower labour demand should help reduce domestic-led inflationary pressures. The wage data was more concerning – with an annual 8.2% gain in three months to June, including bonuses. But a chunk of this can be attributed one-off factors in the health and social care sector. Next month’s earnings data will be a crucial watch to see whether this trend continues.
The easing in the annual inflation rate was mainly driven by falling gas and electricity prices. This was due to the lowering of the Ofgem price cap in July. Food and non-alcoholic beverage prices rose by 0.1% between June and July 2023, compared with a rise of 2.3% between the same two months a year ago. These declines were partially offset by upward effects coming from hotels and passenger transport by air.
Despite the improvement seen in the headline figure, core inflation – which better captures domestic inflationary pressures – remained flat at 6.9%. Similarly, services inflation, which Governor Andrew Bailey is watching closely, accelerated to 7.4% from 7.2%. The BoE will want to see more progress on these measures before they feel confident enough to pause their rate hiking cycle.
With UK terminal rate expectations having declined from around 6.4% to 5.8% over the last month, we saw expectations edge higher to 5.9% following yesterday’s wage data. Sterling posted modest gains following the CPI report.
Looking ahead to the BoE’s next meeting on 21st September, markets expect another 25-bps hike, although much will depend on the CPI and labour market reports for August.”
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments on what does today’s inflation data mean for investors:
“UK government bond markets were knocked back by last week’s more robust GDP numbers and this week’s wage data. This CPI reading doesn’t really change the view that the Bank of England still has more work to do, which should support bond yields and suppress prices. Similarly, in currency markets the pound has been robust this year in the expectation UK interest rates will peak and remain higher than in other countries in order to combat more persistent inflation, and today’s CPI doesn’t significantly change that picture.”
Derrick Dunne, CEO of YOU Asset Management, commented: “CPI inflation plummeted to 6.8% in the 12 months to July, thanks in no small part to the energy price cap cut. While this particular deflationary factor might be a one-off, the second consecutive fall in inflation indeed offers hope to those who have been hardest hit by cost-of-living pressures.
“The big problem now is that wage growth is rising faster than inflation for the first time in over a year, making the possibility of a wage-price spiral look increasingly real.
“Interestingly, hotels and air travel have been the largest upward drivers in July, showing that even a cost-of-living crisis isn’t getting into the way of a summer holiday season.
“So far in 2023, the Bank of England has been trying to engineer positive outcomes as the economic support introduced to soften the effects of the pandemic took inflation and wage growth ever higher. As we head into the second half of 2023, markets will be heavily focused on whether the rate hiking cycle is bringing the Bank anywhere close to hitting its 2% target, as well as the potential longer-term impact on the economy.
“For now, investors must prepare themselves for more market turbulence, while taking comfort in the fact that there continues to be opportunities to support every saver’s long-term goals.”
Sekar Indran, Senior Portfolio Manager at Titan Asset Management, comments on today’s UK inflation update:
“Core inflation remains stubborn and after yesterday’s strong wage growth data, a 50 basis point hike is not off the table in the BoE’s September meeting. The next inflation print is due the day before the BoE’s interest rate decision where we could see the headline figure edge up again due to higher fuel prices.”
Steve Windsor, co-founder and principal at Atrato Group, comments : “Today gives further good news on UK inflation, with headline CPI continuing to trend downwards.
This morning’s inflation data follows yesterday’s food price inflation data which was 2.2% lower.
Today’s consumer price index (CPI) data relieves some of the pressure on the Bank of England for further rate hikes, and indicates that we may have topped out inflation-wise in this cycle.
Investment markets, particularly commercial property markets, will breathe a collective sigh of relief on these lower inflation numbers. By looking at previous economic cycles, the right time to buy commercial property is at or around the penultimate rate hike.”
James Lynch, fixed income manager at Aegon Asset Management:
“We have recently had a big data week in the UK, firstly GDP which was stronger than expected due to the manufacturing sector which raised a few eyebrows, yesterday we had employment data which showed even as the labour market is loosening (unemployment rate has risen from 3.5% to 4.2% since last year) wages are still proving to be too strong from the Bank of England’s liking and today was inflation.
The inflation print this morning was broadly in line with market and BoE expectations. The headline rate of inflation fell from 7.9% to 6.8%. According to the ONS the falling gas and electricity prices provided the largest downward contributions and hotels and air fares were the largest upward contributors to the print. The services component therefore which gets a lot of attention actually rose from 7.2% to 7.4%. This along with yesterday’s wage data will mean if there was a BoE meeting with only this information another hike of policy rate of 25bps would have been on the cards. We do however have another round of employment and inflation data to look forward to before the next meeting on the 21st September, and this will decide the size of hike, but for now 25bps looks the most likely option.”
Janet Mui head of market analysis at wealth manager RBC Brewin Dolphin, on the UK inflation data.
“UK inflation came in higher than expected on both headline and core measures. Utility bills are the biggest driver of slower headline inflation and food prices inflation continued to slow, which are good news for many households. That said, for domestically-generated services, inflation has strengthened, due to a resilient labour market. Hotel inflation was a key driver, so for those looking at staycation it is getting costlier.
The Bank of England is data dependent, and the string of data (including wage growth yesterday) suggest inflation is sticky and hard to reach 2%. This strengthens the case of further rate increases. A 25-basis point rate increase is fully priced in by markets with one-third chance of a 50-basis point hike. Peak rate expectation is edging closer to 6% in March 2024.”