Client Affairs

UK Inflation Overshoots - Wealth Managers React

Editorial Staff, 17 June 2021

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The UK CPI is up 2.1 per cent for May. Separately, the PPI recorded a +10.7 per cent year-on-year rise showing clear pressure on prices of raw materials, fuel and transport that are pushing up producer prices. Managers look at the investment implications of yesterday's figures.

UK inflation overshot forecasts for a second month as a recharged UK economy drove up prices. The latest Office for National Statistics figures showed the price of consumer goods rising 2.1 per cent in the year to May, up from 1.5 per cent in April. It is the first time since July 2019 that the number has beaten the Bank of England’s 2 per cent target. Fund managers look at what this poses for investors.

Jason Borbora-Sheen, co-portfolio manager of Ninety One Diversified Income and Cautious Managed Funds
“Cyclically, a pickup in inflation is likely to continue a little while longer as the negative base effects wash out and demand comes back as economies reopen. Although we have already seen inflation in the US move meaningfully higher, there is still scope for inflation expectations to be upgraded with respect to Europe. A general resurgence in inflation is unlikely until global output gaps have narrowed further. However, the US Federal Reserve has remained dovish in terms of overall tone, and therefore its policy in order to support inflation gains further.

“It is likely, due to base-effects, that globally inflation will start to moderate in late 2021. It will then become important to monitor whether this move-up was transitory or more persistent as 2022 unfolds. We see there being some risks in 2022 as that inflation moves to higher levels more consistently.

“If 2021 inflation moderates, it is likely that more defensive sectors can outperform, those such as REITs or healthcare. If inflation attains higher levels in 2022 then this would potentially negatively impact the winners of recent years, such as tech stocks, the US equity market relative to the rest of the world, and longer-duration fixed income. The combination of faster nominal growth globally, and easy policy could also weaken the US dollar. The beneficiaries are likely to be traditional cyclical sectors, short duration, emerging markets in general, and commodities.

“To get an accurate gauge on inflation, investors should monitor global inflation rates, not just in the Eurozone and the US but also in China where CPI has been low, alongside alternative measures of inflation such as real-time online prices, and market-based measures such a break-evens. Should inflation continue to move higher, then this increases the pressure on the US Federal Reserve to tighten policy, this could create a more positive correlation between equity and bond prices and investors should consider duration and equity hedging."

Mike Owens, global sales trader at Saxo Markets
“On its own, the pickup reflects higher prices as the economy emerges from lockdown and therefore supports the central bank’s current view that the inflation surge will be temporary. Separately, input data from the Producer Price Index recorded a +10.7 per cent year-on-year rise in May showing clear pressure on prices of raw materials, fuel and transport pushing up the cost of goods for producers. This is pretty ominous and echoes last week’s comments from Andy Haldane that further high street inflation can’t be far behind.”

Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond Fund
"Whilst much of the jump will of course, but justifiably, be put down to transient factors, warning signs of longer-lasting inflation are starting to build: core CPI (which excludes fuel, alcohol and tobacco) rose to 2 per cent and [figures for] wages released yesterday (along with a raft of other pretty strong employment data) rose to levels well above 5 per cent higher than numbers from one year ago. We will continue to watch core inflation and particularly wages for giving indications on whether inflation will prove to be more lasting than many believe. Wage cycles are long lasting, and can become self-fulfilling via inflation expectations more broadly, and this will be key.

Longer-term investors need to be wary
"For investors, given the likelihood of continued central bank support of nominal yields, and inflation prints that are starting to appear as though they may be more sustainably above target levels than they have been for a very long time, it still makes sense over the long term to own real yields from a strategic perspective. If nominals are supported and inflation stays sticky, real yields are a good thing to own."

 Andrew Jones, portfolio manager at Janus Henderson Investors
“Even though it's not quite as headline grabbing as the recent inflation print in the US, it’s still the first time that inflation has been above target in nearly two years. While some of the increase relates to rising petrol prices, goods and service sector inflation also picked up. With demand strong, increasing cost pressures in a number of areas and weak base effects, inflation is likely to remain above target for the foreseeable future.”

Jason Cozens, founder and CEO of Glint
"Consumers should be deeply concerned about continued rising costs throughout the rest of 2021 now that the Bank of England's inflation target has already been surpassed - especially as there is no sign of any improvement on the record low interest rates currently hurting consumers and savers."

"Rising inflation is a global problem. It's at its highest levels since the financial crisis in the US, hitting 5 per cent up from just 1.5 per cent in January. Similarly, production prices in China are at the highest level since 2008, up 9 per cent in a year - consumers will face a huge hike in prices if these increased production costs are passed on."

"Unfortunately, consumers are hit by a perfect storm of factors that collude to erode the value of our cash and savings. In addition to spiralling inflation and minuscule interest rates, the continuation of quantitative easing - around £900 billion since the financial crisis - and unprecedented levels of government borrowing - the UK's national debt recently hit £2.17 trillion or over 98 per cent of GDP - ensure that the purchasing power of sterling continues to decline over time."

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