The ONS has announced this morning that for the year to October, UK inflation has fallen to its lowest levels for two years – at 4.6% – even lower than experts were anticipating.
Compared to last month’s inflation rate of 6.7% this reinforces the view that the direction of travel for inflation is continuing downwards. But what does it mean for markets, businesses, consumers and asset allocation decisions?
Investment strategists and fund managers have been sharing their views on this latest inflation data with Wealth DFM today as follows:
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services, said:
“Today’s sharp drop in headline CPI inflation of 4.6% confirms the effect of the fall in Ofgem’s energy price cap in October. This deep plunge will be welcome news to the government following its pledge last December to halve the rate of inflation to below 5% by this Christmas.
“Food prices remain elevated but on a falling trajectory, while restaurant, clothing and furniture prices have dropped more timidly. This sends a clear sign that the Bank’s aggressive interest rate hikes are paying off, albeit slowly and at the expense of subdued economic activity.
“The Bank has warned that the labour market and trends in wage growth will be further determinants for how fast inflationary pressures subside. Data earlier this week showed that average earnings are still far above levels deemed consistent with the 2% medium-term target, and so despite today’s CPI fall the Bank will likely feel vindicated in continuing its guarded approach to interest rate policy.
“With the laggard impact of interest rates still to be felt, economic activity will likely remain weak in the months to come, leading to incremental eases on price pressures.”
Derrick Dunne, CEO of YOU Asset Management, said:
“The Consumer Price Index data released this morning gifted the Prime Minister some welcome light in the dark this Diwali, with the CPI falling to below 5pc – enabling him to come good on his inflation pledge after all. It comes a day after the release of heavily caveated ONS Labour Force Survey estimates, which point to a continued tightening of the job market and wage rises slowing in construction and manufacturing.
“All of which gives the Monetary Policy Committee plenty to mull over when it next meets. It is looking increasingly unlikely that they’ll vote in favour of another base rate rise as they wait to see the ongoing impact of higher interest rates in a number of key areas. That said, it’s not time to pop the cork on the champagne bottle just yet, as it is also, according to the Bank of England governor, unlikely that we’ll see the base rate start to come down until well into next year.
“Inflation may have now started to ease, but keeping borrowing costs high for the foreseeable future will continue to weaken consumer confidence and depress sales. It is a delicate balancing act the Bank needs to pull off as it tries to keep inflation in check. The worry is that it has been too heavy handed in its efforts to-date. That heavy handedness will exact a toll. We have to wait to see how heavy it is.
“Anyone concerned about how these latest rounds of data might impact their investments should seek professional financial advice.”
Lindsay James, investment strategist at Quilter Investors, said:
“The Prime Minister will be breathing a deep sigh of relief today, especially given the political events of the last few days. Halving inflation was meant to be the easiest of his five priorities to achieve as it was a year on year comparison, and 2022 saw inflation rise sharply. Although things got a little close for comfort, today’s sharp drop in inflation to 4.6% is a positive step on the long road back to target levels. However, this has been predominantly driven by factors that look unlikely to be repeated in the months ahead.
“Energy prices are the most significant contributor to the fall, with gas costs highlighted as 31% lower in the year to October 2023, and electricity costs down 15.6%. Unfortunately the loss of £400 of support from the government per household towards energy bills makes the real impact on consumers ‘cost of living’ far more modest, whilst gas prices have recently moved higher, reflecting global supply constraints, which will feed into a higher Energy Price Cap from January onwards.
“Food appears to be seeing more consistent reductions, with this the seventh month of falling annual inflation readings, supported by a trend of falling prices for domestically produced food, increased competition amongst the supermarkets, and generally lower soft commodity prices.
Whilst this headline data will on the face of it be welcome news for the MPC, they will want to see more evidence of slowing inflation across the economy, rather than it coming primarily from fluctuations in international energy markets. With Core CPI (excluding energy, food, alcohol and tobacco) falling more gradually, now at 5.7% and down from 6.1% in September, it is clear that further progress towards the target of 2% is likely to be relatively slow.”
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, said:
“This morning’s softer-than-expected inflation print will not only be welcomed by Downing Street, but also by monetary policy makers in Threadneedle Street. For the Bank of England (BoE), the weakness in core inflation will be more significant than the drop in the headline figures. The drag lower from energy base effects as last year’s changes to the price cap fall out of the numbers has been long awaited, and well understood. More important, is to see some of the stickier parts of the inflation basket cooling more quickly than previously forecasted.
“This report lends further support to the BoE’s recent commentary that interest rates have now reached sufficiently high levels to slow the economy down. But, importantly, the BoE is working to an inflation target of 2%, not sub 5%.
“The case against any further rate hikes is increasingly clear, but significantly more evidence will be required before rate cuts can start to be considered. The tightness of the labour market remains the key concern. Yesterday’s hotter than anticipated wage growth figures highlighted that 2% inflation is still some way away, and unfortunately is only likely to be reached following a more substantial slowdown in the economy.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley), said:
“After the US, it’s now the turn of the UK surprising to the downside with its inflation numbers. While upside risks to interest rates exist in the UK, as the level of inflation remains well above the Bank of England’s target, today’s numbers strengthen the case for a pause and, likely, the end of the rate hiking cycle.
“Both headline and core inflation were lower than expected, albeit not yet consistent with the central bank’s price stability target. We expect the Bank of England to hold interest rates at 5.25%, before cutting them slowly over the course of 2024.
“This trend looks more general: we think that the US and the Eurozone have reached the peak in interest rates, too. We are sticking with our current portfolio positioning, holding more government bonds and less riskier bonds relative to our long-term allocation.
“Within equities, we hold mostly large, high-quality companies across the US and Europe, which are less volatile than the broader market. Hence, when volatility increases, these tend to perform better than the overall market.“
James Lynch, fixed income investment manager at Aegon Asset Management, said:
“Now that the Bank of England have paused interest rates at 5.25% at two meetings in a row, they really did need some confirmation that they are on the correct course of action and they got that this morning with the October inflation numbers.
“The BoE had a forecast of 4.8% CPI , it came in at 4.6% and more importantly services fell to 6.6% while they expected 6.9%. The big move down in inflation came from the Ofgem price cap falling in October. This contributed the most to the fall but outside of that it was also a pretty broad-based move down in most components.
“The UK inflation numbers are now not looking too out of line with the US (3.2%) and the Eurozone (2.9%), and we would expect inflation yoy rates to continue to fall into next year. The pausing of policy rates, sluggish GDP growth and inflation falling faster than expected is a pretty good backdrop for the gilt market.”
Melanie Baker, senior economist at Royal London Asset Management, said:
“Although Q3 Gross Domestic Product (GDP) was a touch stronger than expected, the details were downbeat with falls in consumer spending and business investment. The contribution to growth from net trade looks to have been much more positive than expected, but partly on the back of falling imports. That itself will likely partly reflect weakness in domestic demand.
“Looking at the monthly figures, it appears to paint a more positive story, with growth in September slightly stronger than in August. However, less industrial action in the health service, and warmer than average temperatures, appear to have played some role and the broader run of data still suggests this is an economy that has grown little since early 2022.
“The UK continues to avoid going into a technical recession, which would need two consecutive quarters of negative growth, though it clearly wouldn’t take much of a back revision for Q3 GDP to have fallen. The Purchasing Managers’ Index (PMI) business surveys continue to look consistent with modestly falling private sector output. If the UK continues to see little to no growth, the experience of the economy, including the jobs market, may not be very different than it would have been had the UK experienced short, mild recession.
“This release is likely to have little net effect on the Bank of England’s thinking. According to its recently published November Monetary Policy Report, it was expecting flat GDP in Q3 and 0.1% in Q4.”
George Lagarias, Chief Economist at Mazars, said:
“CPI receding at manageable levels probably puts the nail on the coffin of this rate hike cycle. We could begin to see the end for this inflation wave, especially if we don’t experience higher energy prices in the next few months.
“Lower inflation is consistent with the sluggish consumption data of the past two months. As such, one questions still looms large: will the economy that has succeeded in bringing inflation down to more manageable levels, also achieve to keep growth above the recession line?”
Charles White Thomson, CEO at Saxo UK, said:
“An encouraging print on UK inflation and a signal that the first phase of the attritional and costly war to suppress our virulent form of inflation is over. The ferocious 515 bps of rate hikes has taken its effect and UK inflation now rests just under the important 5%.
“We are now in a new phase of skirmishing and cleaning up inflationary outliers and importantly, remaining alert to pockets of resistance including the recent wage growth number. This will also encourage the hand of the MPC to keep their rates on hold stance.
“This is about allowing the battered UK economy and consumer to regroup. Alert to the risks but more forgiving with the blunt weapon that are interest rates is my suggested stance. Anaemic GDP growth now takes the place of public enemy number one.”
