Data released from the Office for National Statistics (ONS) this morning has revealed that UK CPI inflation for the year to the end of January rose by 4.0% – the same rate as in December. According to the ONS, the largest upwards contributors to the monthly change were housing and household services (principally higher gas and electricity charges) while the largest downward contribution came from furniture and household goods, and food and alcoholic beverages. Food prices saw their first monthly fall for over two years.
But what does this mean for wealth managers? Clearly, thoughts are turned to what today’s inflation data might mean for the Bank of England at its next MPC meeting – and when we might begin to see a reduction in UK interest rates. Today’s data show that inflation is still some way ahead of the Bank of England’s 2% target.
Investment experts have been sharing their views with Wealth DFM as follows:
Andrew Oxlade, Investment Director at Fidelity International, said: “Bank of England policymakers will be quietly pleased that inflation remained flat at 4% in January. The market had expected a rise to 4.2% which would have marked a second monthly increase, following a rise from 3.9% to 4% in December. We shouldn’t forget that 4% is still double the Bank’s inflation target – Britain’s inflation problem is far from over.
“The January numbers showed strong inflationary pressure feed through from Ofgem’s increase to the price cap on household bills at the turn of the year. Ofgem was responding to rising global geopolitical tensions which have been driving up energy prices. The disruption to supply chains from attacks on container ships may also begin to have an impact on consumer prices in the UK in the coming months. On a brighter note, food prices saw their first monthly fall in two years in January giving some respite for households suffering under the cost-of-living crisis.
“Inflation is expected to keep falling in the coming months, but it will be the pace of those reductions that is so influential to interest rate thinking. Ahead of the inflation numbers, markets were pricing in only one cut by the end of the year when a month ago they had been pricing in several, taking the key bank rate down from 5.25% to 4.75%, and possibly down to 4.5%; borrowers should be braced for a longer wait for cheaper mortgages.
“The inflation data will not be the only numbers weighing on the minds of policymakers. Wages are still rising at a robust rate. Data yesterday showed salaries rising at a meaty annual rate of 6.2% in December, down from 6.7% – higher than economists had expected. And all the time wage rises remain high the Bank of England’s rates decision-makers will be worried that bigger pay packets could generate price pressure and risk an inflationary spiral.
“This all has implications for markets, which have been particularly sensitive to interest rate forecast changes in recent months. The stock market rally in November and December was largely driven by expectations of cheaper borrowing in the US, UK and elsewhere. With rate cuts looking less certain by the start of 2024, the rally faltered in the UK. The US has been more robust, with the S&P 500 closing above 5000 points in recent days for the first time. This is largely because of investors’ devotion to the big tech ‘Magnificent 7’ stocks. But even that faith may be tested if rate cut hopes continue to retreat.”
According to Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services, while inflationary pressures have strengthened in January they will soften in Spring commenting:
“This morning’s January CPI data shows a continuation of the strengthening inflationary pressures seen in December. Despite the sharp fall in consumer price pressures over the first month of the year, inflation has not abated, justifying the Bank of England’s decision to hold UK interest rates steady at its early February meeting.
“There are numerous forces influencing prices for UK customers – Ofgem’s lifting of the energy price cap has added upward pressures, while a hearty fall in food prices and alcohol duty has provided some respite – and just in time for Valentine’s Day.
“But the Bank of England’s vision is not clouded by rose-tinted glasses, with their recent economic forecasts emphasising that any future decisions regarding interest rate cuts will consider the evolution of price pressures. Today’s confirmation of increased year-on-year core consumer prices will signal that rate-setters must not yet drop their guard.
“That being said, today’s inflationary pressures are not expected to last. With winter slowly turning into spring, inflationary pressures will gradually improve, the icing on the cake being the sharp drop in the utility regulator’s energy price cap scheduled for April. All this should drive inflation to the 2% target, as anticipated by the Bank. Should the summer bring a partial reacceleration in inflation, as is forecast, aggressive rate cuts may not be on the horizon. Nonetheless, a partial loosening will provide welcome relief for hard-pressed households and businesses in the months to come.”
Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, said:
“Our online data from PriceStats had pointed to some risks of a downside surprise to UK inflation in January, but the fall was bigger than even we anticipated. Base effects should now set up a very sharp fall in the annual inflation rate in the next four months. This may yet be enough based on January’s benign reading to get the inflation rate near enough to target to allow the BoE to begin its easing cycle in June.“
James Lynch, fixed income investment manager at Aegon Asset Management said: ‘The UK Consumer Price Index inflation benchmark unexpectedly stayed the same last month at 4.0%, after expectations it would rise to 4.1%. Core CPI is still high at 5.1% but again this is unchanged. However the Bank of England have been paying particular attention to services CPI as they see this as a more true representation of domestic inflationary pressures, and this rate was surprising weak at 6.5% compared to expectations of 6.8%, this does look to be related to a large drop in airfares (payback from last month).
‘The data so far out of the UK has been GDP softer, retail sales weaker, and now lower inflation prints, if the BoE wanted to set up interest rate cuts in the coming months the data is coming in consistent with that argument. However whether they choose to take that option is still up for debate.’
Commenting on the ONS inflation figures Hetal Mehta, head of economic research at St. James’s Place, said: “UK inflation moved sideways in January. Whilst the uptick that economists were expecting was avoided, it still remains at double the Bank of England’s 2 percent target. What will still be concerning the BoE is the stickiness of services inflation, especially as it comes on the back of strong wage growth. But compared to big upside surprise in US inflation yesterday, today’s UK numbers come as slight relief in relative terms.”
Lindsay James, investment strategist at Quilter Investors commented:
“Following what had been a period of steadily declining inflation, this morning’s data from the ONS reveals the UK saw another pause in the pattern of headline disinflation, with CPI at 4%, the same rate as in December 2023 and still double the Bank of England’s target.
“Higher gas and electricity prices lead the way as the primary driver of this uptick, with energy prices in January 2024 reported to be 18% lower than at the peak in January 2023, but 89% higher than in January 2021. However, this is in line with prior expectations and with the energy price cap set to decline in April, this should set the stage for headline inflation to decline more substantially in coming months.
“Core inflation, excluding energy, food, alcohol and tobacco, has been falling considerably slower than the headline rate, and progress here also appears to have stalled. It held steady at 5.1% in November and December, and once again refused to budge in January, driven in part by strong services inflation which rose from 6.4% to 6.5%. That said, the month-on-month data is more encouraging, and so this is unlikely to sway the Bank of England from its recent suggestion that interest rates have peaked.
“Yesterday’s UK labour market statistics revealed a further fall in wages, with annual growth in regular earnings (excluding bonuses) decreasing to 6.2% in October to December, down from 6.6% in the prior three-month period. However, while on the face of it this seems high, annualising the pattern over the past three months indicates that this is now falling quite quickly, with the annualised nominal growth rate of regular earnings running at 2.2% – rapidly nearing the Bank of England’s target and providing a little reassurance that this inflationary pulse is weakening.“What’s more, tomorrow’s GDP data is widely anticipated to reveal the UK fell into a recession at the end of last year. Though Andrew Bailey has pushed back with an expectation that it will be both shallow and short lived, pressure on the Bank to cut rates sooner rather than later will no doubt and today’s CPI data release will do very little to change that.”
