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UK inflation rates exceed Bank of England's two percent target

News Team, 15/08/2019

UK inflation rates have risen above the Bank of England’s two percent target, defying the expectations of forecasters.

The results have prompted a response from prominent figures in the investment industry, analysing the effects of the inflation rates on the investment climate.

Phil Smeaton, chief investment officer at Sanlam UK  believes that the surprising results, which show UK CPI inflation came in at 2.1 percent year on year while RPI inflation was reported at 2.8 percent indicate a residual strength in the UK’s economy even if there are serious difficulties looming on the horizon.

He said: “UK Inflation rates have shown incredible resilience, but the upward pressures are clear. Employment figures are strong, UK wage growth is at an 11-year high, and sterling weakness continues to push up the prices of imported goods.

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond Fund believed that the results were less substantial than Mr Smeaton considered them to be.

He said: “CPI surprised on the upside today, aided by strength in recreation, restaurants and hotels. However, given that the significant risks that the UK economy now faces, we regard today’s print as largely irrelevant.”

Instead, he pointed to wider trends in the market, which suggested the UK was likely to be heading toward a recession. Mr Wells additionally suggested that Brexit was not the only factor at play with global growth not performing at previous levels.

He explained: “The market seems to be waking up to the risk of a no-deal Brexit, as the front end of the UK yield curve is now inverted, with 5-year gilts offering lower yields than 2-year gilts. An inverted yield curve is by no means a perfect indicator of a recession, but in our opinion the risks to growth are now firmly tilted to the downside and this has been reflected by the recent price action in bond and equity markets. Even without Brexit, it is clear that global growth is slowing, so the timing of a potential no-deal scenario in October could hardly be worse.”

Mr Smeaton had a greater sense of confidence in the UK’s readiness for upcoming headwinds, even if he accepted, they posed serious problems for the UK.

Commenting on the readiness of the country’s economy to the upcoming October 31 Brexit deadline, he added: “Consumers are pessimistic about their economic future, but Prime Minister Johnson is resolute in his belief that the UK economy will be ready to soar on 1st November. We are sure that Mark Carney is ready to stand by the Prime Minister and support his post-Brexit stimulus package.”

This outlook differed somewhat from Mr Wells’ analysis. When forecasting the future economic and investment climate in the UK, he believed that so much was contingent of multiple factors that cannot yet be easily prediected.

He explained: “Looking forward, much will depend on the path of sterling and it is not impossible that we will see weaker GDP data and higher inflation in Q4 and into Q1 2020 if there is no deal and the currency is subject to further downward pressure. We don’t think the Bank of England would raise interest rates to protect sterling from further damage and mitigate the inflation shock, so things could get messy quite quickly.”

On a slightly gloomy concluding note, Mr Wells said: “Wage growth has undoubtedly been robust, but we share the view that this is probably either close to or as good as it gets for the UK labour market, given the growing macro risks.”

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