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Industry figures comment on increase in UK inflation rates

News Team, 23/05/2019

Fund managers, economists and business leaders across the investment world are responding to the latest figures from the Office of National Statistics (ONS) which show that inflation has risen on the Consumer Prices Index (CPI) from 1.9 percent in March to 2.1 percent in April.

This is the first time inflation has surpassed the Bank of England’s target since December, and commentary on its the potential wider impact to the UK economy has so far been generally negative. Key factors for the increase in inflation percentages cited by figures in the industry include Brexit uncertainty, rising energy costs,

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond Fund, does not think that the increase in inflation rates should be seen as a surprise. He believes it will continue to rise over the course of the year. Furthermore, Mr Wells gloomily predicts that a no-deal outcome to the Brexit negotiations in Westminster could have a significant affect on the domestic currency too.

He said: “UK inflation is on its way back up, and as we expected the trend down in inflation has proved to be a temporary phenomenon. We think there is further scope for UK inflation to rise in the coming months – not least because tax changes have reduced the supply of rental properties relative to demand, and this will push up inflation in private sector rents.”

He added: “All of this is happening in an environment where the outlook for sterling is very difficult to call. If PM May can get Westminster to back her deal, we would expect sterling to enjoy a relief rally from recent 5-month lows, which would mitigate some of the current inflation pressure. However, if there is no deal, we could easily be looking at the pound slumping to $1.10 versus the current level of $1.268 and that would push inflation even higher.”

Ben Brettell, senior economist at direct-to-investor service Hargreaves Lansdown, cited rising air fares and energy prices as reasons for the inflation rates, and also noted the effect of Brexit uncertainty on both the wider economy and policy decision making.

He said: “UK consumer price inflation ticked up in April to 2.1 percent, exceeding the Bank of England’s 2 percent target for the first time this year. As expected, air fares and energy prices drove the increase, after energy regulator Ofgem increased its price cap for standard variable tariffs. Higher inflation would usually bring pressure on the central bank to raise interest rates – but these are far from normal times. The Monetary Policy Committee is rightly reluctant to tweak policy while Brexit hangs over the economy like the Sword of Damocles.

Mr Brettell did however, argue that outside factors such as fuel and energy prices were more routine influencers on inflation rates, and he differed slightly from Mr Wells’ view of the inflation rates. He believed it was possible inflation rates would stabilise and not grow month-by-month in 2019, offering his statement under the title “Inflation ticks up, but probably peaks for the year”.  Interestingly, the economist also suggested that the policy makers still had some agency over rates.

He said: “Moreover, fuel and energy prices are notoriously volatile from month to month, and are usually led by factors outside the control of domestic monetary policy. I’d expect the headline rate to fall back as we move through 2019. Core inflation, which strips out these volatile components, remained unchanged at 1.8 percent. So, today’s data changes little - the absence of domestic inflationary pressure means policymakers have licence to leave rates on hold for now. This was borne out in the market reaction, with sterling little changed on the news. This muted response shows traders haven’t adjusted their prediction that the Bank of England’s wait-and-see approach will hold firm at its next meeting on 20 June.”

Phil Smeaton, chief Investment Officer at investment company Sanlam UK, shared the view that the impasse with Brexit was resulting in issues with inflation, which were nullifying wage growth and creating problems for the Bank of England. However, he did argue that the resilience of the UK economy did afford the governor Mark Carney some leeway to potentially raise interest rates if necessary.

He said: With progress on Brexit completely paralysed, rising inflation poses a challenge for Carney. As prices creep up above the 2 percent target, the improvements in wages seen earlier in the year are being cancelled out. Uncertainty persists around the UK’s future relationship with the EU and the US trade war with China shows little sign of abating. This prompts a certain wariness about a rate increase in the short term. The unexpectedly strong performance of the UK economy, however, has increased the Bank of England’s ability to sustain an interest rate rise if it’s deemed necessary. But until Brexit clarity is finally established, Carney must continue to walk a tightrope.”

Alessandro Capuano, head of Brokerage and Business Development at financial services company FinecoBank had a sunnier outlook on the situation, believing the reported results could benefit British consumers.

He said: “As a result of the UK Inflation rise seen in the latest figures, the British consumer can take advantage of the benefits of a growing economy, despite fears around Brexit. Nonetheless, the negative impact of this rise is likely to be minimal as wages are set to continue rising well above inflation.

Mr Capuano, like Mr Brettell, attributed the inflation a “hike in the energy and transport prices”, but argued that the sterling could be strengthened by the Brexit impasse, a contrast to Mr Wells’ predictions.

He explained: “This is likely to have a positive effect on Sterling following yet more stalls in Brexit negotiations. Higher inflation will likely set a path towards an interest rate increase - which had been almost completely ruled out earlier this year – likely strengthening Sterling, and maybe also leading to a selling opportunity on GBP/USD.”

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