Investment and finance experts share their opinions on what today’s inflation data might mean for the UK economy, investors and markets. That’s following the latest inflation announcement from the ONS that UK CPI has hit an unexpected high of 5.1% in the month to November 2021.
James Lynch, fixed income investment manager at Aegon Asset Management comments:
“This is more than economists and the BoE were expecting by some margin. We are almost getting used to big inflation numbers now, but this will not sit easy with the policymakers at Threadneedle street.
“This is especially the case as it comes straight off the back of stronger than expected labour market news. The unemployment rate is down at 4.2, and wages are rising by 4.3%, again all better than what the BoE had been forecasting.
“Given this is the type of data MPC members were focusing on to make the call to raise interest rates at the 16th Dec meeting, a policy move should have been all but a foregone conclusion. The only reason a move is now not going to happen would be is due to the value in waiting to see how the Omicron wave of infections affects government policy and economic activity in January.
“The reality is, it should not be a medium- or long-term consideration for inflation, if anything it may add to the inflation problem we already have. However I am sure the optics of raising interest rates a week before Christmas, along with a potentially very high covid infection wave which may involve more restrictions on economic activity, is something they are very aware of.”
Commenting on rising inflation and a tough year ahead for SMEs, Andrew Aldridge, Partner at Deepbridge Capital, said:
“As expected, inflation continues to rise gradually with expectations being that it will likely peak around the 5% mark. This further supports our belief that 2022 will be a difficult year for many SMEs across the country who will struggle to fund working capital needs due to the reduced value of their dry powder. It remains critically important that scale-up businesses, particularly in high-growth sectors such as digital technologies and life sciences are supported, as they will play a vital role in driving economic growth in the post-pandemic world.
“Government initiatives such as the Enterprise Investment Scheme (EIS) have never been more important for helping entrepreneurs and innovators source the funding they require, whilst also offering private investors with tax incentives to develop UK-supporting private equity portfolios. With our EIS funds reaching record levels of funding in 2020/21 it is evident that there is considerable demand from investors and financial advisers alike to invest in early-stage UK companies which we believe will be at the forefront of our economic recovery.”
Modupe Adegbembo, G7 Economist at AXA Investment Managers believes that the peak is yet to come commenting: “in the short-term headline CPI should dip from November’s print. The resumption of more usual Xmas discounting in clothing prices and softening in oil prices feeding into petrol costs should see inflation slip next month. However, more broadly we expect inflation to increase further in the coming months, particularly as utility prices rise sharply in the next OfGem price cap adjustment due in April 2022. This threatens to raise CPI inflation above our forecast of 5%.
“Today’s print reaffirms the pressures on the Bank of England to increase interest rates to quell potential second round effects of price increases. However, the uncertainty on the near-term outlook is high as result of Omicron and the impact that Plan B restrictions will have on the economy. Given the continued inflationary pressures in the economy, we expect the MPC to take a cautious first step to tighten policy tomorrow, increasing Bank Rate by 0.15% to 0.25% whilst guiding the importance of the evolution of Omicron on the path of future rate rises. Initial financial market reaction saw sterling rise against both the US dollar and the euro.”
Commenting on today’s data which he sees as strengthening the case for a rate rise, Rupert Thompson, Chief Investment Officer at Kingswood, said “These numbers, along with the IMF’s warning yesterday to the MPC against ‘inaction bias’ and the prospect of inflation heading even higher temporarily in the spring, clearly strengthen the case for a rate rise tomorrow. Even so, the uncertainties thrown up by Omicron mean on balance the MPC still looks likely to hold off raising rates until February. “
Colin Dyer, Client Director at abrdn commented: “Inflation is now more than seven times what it was at the start of the year.
“Even if a base rate rise is imminent, any subsequent increase to interest rates on things like simple savings accounts will fall far short of where inflation sits.
“Savers need to consider all options to make sure that their money is keeping pace with, or outpacing inflation. Anything less means their funds will slowly but surely be eroded in real-terms, every day buying that little bit less.”
Sukhdeep Dhillon, Senior Economist at BNP Paribas Real Estate, comments: “Inflation is now a clear and present risk for the UK economy. The figures will place the Bank of England on tenterhooks at a time when they could do with some good news. The hope may well have been that rising prices were transit in nature, but with Omicron spreading and signs of a further supply chain squeeze already showing, that transitory period looks like it’s lengthening.
“There are positive economic signs which should not be overlooked. Unemployment has fallen to 4.2% in October and pay growth has beaten expectations. But the situation is delicate. Concerns about a wage/price spiral loom large and the need for intervention may be unavoidable. Should the economic mood shift to an even more negative mindset, the risk of a fragile economy will become very real very fast. All eyes will be on the Bank of England interest rate decision on Thursday.”
As for what this means for savers, Sarah Coles, senior personal finance analyst, Hargreaves Lansdown believes that this leaves the Bank of England with a dilemma commenting: “rising inflation, alongside yesterday’s better-than-expected jobs figures, puts them under pressure to raise rates, while disappointing growth statistics and the ongoing threat from the Omicron variant raise the risk that higher rates could damage a fragile economy. The market isn’t expecting a rise in December, but it’s not expecting a long delay either.
“Of course, the market is often wrong about rates. And even if it’s right, waiting for a rate rise before fixing your savings rate could be an expensive mistake. Once it hits, there’s every chance that huge numbers of banks won’t pass the rise on. Even if they do, they may only boost rates by a fraction, and it could take them weeks.
“Let’s assume you were considering fixing £30,000 in savings for a year at the start of September 2021, when the best rate on the market was 1.5%, but you were concerned that rates might rise in the interim, so you decided to hold off and leave your money in an account paying 0.01%.
“If you’d have fixed, over the past 3 months you would have made around £112 more in the fixed rate account. In the interim, the best account fixed for one year has fallen slightly. If rates are delayed another three months – or it takes that long for savings rates to respond – you would have made £224 more in the fixed account.
“Even if you sat on the rock bottom rate until the start of next March, then rates rose and you switched into an account paying 1.75%, by September 2022 you would have made £188 less than if you’d just fixed in the first place.”
Derrick Dunne, CEO of YOU Asset Management, commented: “UK inflation blew expectations out of the water this morning, with the CPI reading jumping 5.1% in the twelve months to November (up from 4.2% in October) – months ahead of the IMF’s prediction that we’d reach that level in Spring next year. It’s the highest 12-month reading in over a decade.
“This week, however, inflation itself is not the story. Instead, yesterday’s employment data will be front and centre as the Bank of England meets to discuss tomorrow’s interest rate decision. Doubts about restrictions and their impact on the jobs market have already dashed predictions of a pre-Christmas rase rise. But with inflationary pressure remaining high and with the IMF discouraging the Bank from delaying any further, a change to the base rate is by no means off the table.
“With that in mind, investors would do well to prepare for all eventualities, and selecting investments which track the inflation rate will help to maintain a resilient portfolio.”
Story originally appeared on fca.org.uk