The latest ONS January inflation data published this morning, has showed that UK CPI inflation has shrunk marginally to 10.1% year on year to the end of January. The US CPI data was released yesterday, showing a slight uptick to 6.5%. The UK figure compares to a 10.5% figure for December and – looking on the positive side – is marginally better than many analysts had been predicting.
Commenting on the inflation data, investment experts have been sharing their views with Wealth DFM as to what the latest news means for the future direction of interest rates, for fixed income and equity markets as follows:
Daniel Casali, Chief Investment Strategist at wealth manager Evelyn Partners, says this marks a further retreat for the annual inflation rate from the peak of 11.1% in October:
“The January CPI data provides more confirmation that UK inflation has peaked. Looking into February and the next few months, falling wholesale natural gas and fuel prices suggests a favourable backdrop for inflation to slow further. Importantly, surveys of inflation expectations have also come down from peaks.
“A key risk against lower UK inflation is the tightness of the labour market and the power of unions to force through higher wage increases amid strikes. The latest data show that underlying wage rates (ex-bonuses) have re-accelerated to 6.7% on a 3-month moving average, its highest rate since the summer of 2021.
“Nevertheless, lower energy-driven headline CPI inflation should reduce pressure on the Bank of England to raise interest rates significantly from here. Money markets have priced in a pause in the BOE’s base rate by the summer at around a peak of 4.5%, from the current level of 4.0%, before falling to 4.25% by January 2024.
“Should a scenario of peaking inflation and monetary tightening play out, it reduces the risk of an economic hard landing in the UK. Moreover, even though the IMF expects the UK to post -0.6% real GDP growth in 2023, the weakest rate out of the G7 economies, it does not necessarily mean that UK stocks should underperformed their global peers. That’s because,
“UK-listed multinationals are closely linked to what goes on in the rest of the world. Looking forward, the reopening of the Chinese economy from zero-Covid policy could be a shot in the arm for UK companies, which derive around 77% of their sales from overseas.
“UK stocks are also riding a rally in global stocks boosted by optimism that the Federal Reserve is set to pause on US interest rates, in line with slowing inflation. With US rate hike expectations capped at around 5% or so, the US dollar has begun to weaken. The greenback has also been led lower by China reopening, and sharp declines in European wholesale gas prices, reducing fears of an energy crunch. Capital is being put to work in financial markets as investor confidence returns. Even UK company earnings expectations for 2024 have picked up slightly since the autumn.”
Luke Bartholomew, senior economist, abrdn commented: “UK CPI inflation was softer than expected in January, falling from 10.5% to 10.1% y/y. We expect headline inflation to continue to fall sharply as the year progresses, with powerful base effects leading to favourable moves in wholesale energy prices. Economic weakness will drag inflation well below 5% by the end of the year.
“The path of monetary policy will be driven less by these well understood headline inflation dynamics, and instead on signs of more persistent with inflation pressure. On this front, the inflation report provided the most encouraging picture it has in some time. Core inflation fell from 6.3% to 5.8%, while services inflation, which is most closely linked to domestic demand conditions, declined from 6.8% to 6%.
“This is a broadly similar signal to the one provided in yesterday’s labour market report: an economy that is overheating and generating too much inflation pressure but moving slowly in the right direction.
“We continue to expect the Bank of England to tighten monetary policy further, but today’s report does somewhat reduce the risk of a much higher terminal interest rate. While the outlook for the economy and markets looks weak, this should provide some a little reassure to investors that the interest rate cycle is close to peaking and eventually moving in a more favourable direction.”
Hugh Gimber, global market strategist at J.P. Morgan Asset Management said: “Today’s UK inflation data will likely be met with sighs of relief in Threadneedle Street that the inflation picture is finally starting to improve.
“The monthly decline in price pressures in services sectors such as restaurants and hotels will be particularly encouraging given that these are industries where labour shortages – and therefore wage pressures – have been especially acute. Yet while this morning’s print is a small step in the right direction, the Bank of England still faces a very long journey to get inflation back to target. Absent a rapid improvement in labour supply, UK activity will need to slow further to reduce underlying inflationary pressures. Yesterday’s jobs data highlighted this clearly, with the 12th consecutive month of stronger than anticipated wage growth providing yet more evidence that the labour market continues to run hot.
“Both investors and policymakers should be wary of reading too much into one month of data. The overall message from this week’s data is that inflationary pressures in the UK economy remain strong, and further rate hikes are necessary. We see interest rates of 4.5% as the minimum required to return inflation to target over the coming quarters.”
Ben Gutteridge, director of Model Portfolio Services at Invesco said:
“Though Inflation prints are still eye wateringly high, this morning’s release supports the BoE’s claim that inflationary pressures are moderating. Expectations for a 3% headline rate by year end still appear ambitious, not least given this week’s firm wage data, however, the confluence of weaker commodity prices, goods prices and housing data, suggest inflation could start to fall more rapidly as we move into the summer months
“The BoE has, of late, been preparing markets for a pause in its interest rate hiking policy and, therefore, will feel vindicated in these efforts based on this latest inflation release. Though another interest rate hike is still anticipated in March, thereafter the bank would most likely keep rates on hold to assess the condition of the economy and inflationary trends.
Such is the sensitivity of the UK economy to policy rates however, primarily down to the UK’s preference for shorter-term mortgage deals, that as we move through the year economic conditions may look increasingly perilous. By year end, therefore, the BoE may have flipped to an easing interest rate agenda.
“Though such an outcome makes for troubled reading, equity markets are forward looking in nature. This means UK stock markets can still perform well, even in the midst of a recession, as investors begin to anticipate recovery. It is also worth noting that the dominant companies in the UK stock market are global in nature, meaning the performance of the domestic economy has relatively little bearing for equity investors.”
Richard Carter, head of fixed interest research at Quilter Cheviot said: “As energy prices retreat, UK inflation has dipped to 10.1% but it is proving to be sticky with the rate of price increases falling by only 1% since October 2022.
“With FTSE 100 recently reaching record highs, investors will be somewhat comforted by the direction of travel for prices. However food prices remain a major driver of UK inflation, continuing their upwards march in January with an eye-watering 16.8% increase. Food industry bosses have warned that prices will take considerable time to come down.
“This week’s job’s data is also a contributor, with growth in average regular pay rising to an annual rate of 6.7% in the final three months of 2022, up from 6.5 per cent in the three months to November, which adds to the inflationary spiral. The cocktail of a tight labour market and inflation failing to cool off quickly will remain a cause of concern for Bank of England policymakers, which may mean the Bank’s aggressive strategy stays in place.
Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services comments: “The Bank has heard some brilliant news today, as January’s CPI data reveals the third fall in a row in headline inflation. This drop to 10.1% is largely attributable to easing hospitality and fuel price pressures.
“Surprisingly, against consensus predictions of holding steady, annualised Core CPI has fallen to 5.8%. This is incredibly welcome news for the Bank, and indeed the country at large, as it suggests finally that the lagged effect of rate rises is finally having its desired impact. Given the previous stubbornness of Core CPI, largely due to unwelcomingly persistent service sector price pressures, the Bank may be sighing with relief today.
“It is not yet time to put down the tools, however. Private sector wage growth, a key barometer for the MPC, clocked in yesterday at 7.3%. Still far too high for the Bank, and contributing to still elevated inflation.”
“The Bank will now wait and see whether this is truly the beginning of a downward trajectory. This is one of the Bank’s main concerns, with Mr Bailey saying to the Treasury Select Committee last week he was ‘very uncertain’ about price and wage-setting currently. Today’s data however may make the MPC slightly more certain.”
George Lagarias, Chief Economist at Mazars comments: “Inflation fell more than expected, as the cost-of-living crisis rages on. The January inflation number is consistent with the weakness we have seen in retail in the past six months. It means that companies don’t have much more room to pass cost increases to consumers. All other things being equal, slowing inflation suggests further economic weakness ahead and, possibly, an uptick in unemployment.
“When the central bank embarked on a crusade to lower demand in order to reduce inflation, it knew that a weaker economy and possibly higher unemployment would be the price to pay.”
Rob Morgan, Chief Investment Analyst at Charles Stanley comments: “UK CPI inflation slowed to 10.1% in January, a little lower than consensus estimates, as falling fuel and transport costs helped quell the flames of rising prices.
“We are now seeing confirmation of UK consumer inflation falling away, and that last October was the peak at 11.1%. In fact, it is now falling more rapidly than previously expected. January saw a substantial fall of 0.6% in CPI on a monthly basis, and this was encouragingly broad based with both goods and services seeing overall price declines.
“This will please the Bank of England as it provides evidence that higher interest rates are having the desired effect. The fly in the ointment is food inflation, one of the most important components for households, which is still creeping up. However, with lower fuel costs now set to filter through the economy in the months ahead it is likely we are past the worst. While overall annual inflation is still in double digits, and there is still a long way to go, the trend of the past three months shows inflation is now cooling.
“Following another chunky interest rate rise of 0.5% from 3.5% to 4% earlier this month, the Bank of England may now be set to take its foot off the brake a bit, and March’s interest rate decision could be finely balanced. The UK has experienced the highest annual inflation rate since 1981 and the Bank will want to stamp it out for good. Yet it is also fearful that setting rates too high could stall the economy and worsen any recession. Overall, there is still likely to be one or two smaller rises ahead taking rates to a probable summer peak of 4.5%.”
Royal London Asset Management’s (RLAM) senior economist, Melanie Baker, said:
“Alongside the fall in headline inflation, domestically-driven inflation still looks strong – but perhaps a touch less strong than it did. Services inflation fell, led by transport services. There were more modest falls in inflation in a couple of other services components too, namely housing services and recreation/personal services.
“However, six out of 12 CPI sub-categories contributed positively to the move in headline inflation in January and yesterday’s regular pay data (weekly average earnings) surprised on the upside. It is also hard to attribute too much of the downward movement in inflation to weaker underlying domestic inflation pressure when so much of the fall in year-on-year CPI inflation was about the transport component. The contribution from that component was also accentuated by annual weighting changes. Weakening domestically driven inflation pressures are likely to be more of a story later in the year.
“In the Bank of England’s February Monetary Policy Report, the staff forecast for this January headline inflation figure was 10.1%Y, so today’s data was not an undershoot of their forecasts at least. I still expect further rate hikes from the Bank of England this year while domestically-driven inflation looks strong, but this data in isolation looks more consistent with a pause for now.”