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Inflation hits 3% – industry comment

UK inflation

Maike Currie, investment director for personal investing at Fidelity International, said: 

“Inflation climbed to 3% in September – up from 2.9% in the preceding month. With price rises now one percentage point above the Bank of England’s 2% inflation target, governor Mark Carney will be penning a letter to the Chancellor explaining why inflation is so far above target. But this will be cold comfort to cash-strapped consumers, as today’s inflation figure marks the biggest squeeze on UK households in five years – inflation has not been at this level since April 2012.

“Life is getting much more expensive with an increase in the cost of food, fuel and a last-minute price spike in flights all contributing to the rise in inflation. Meanwhile, our pay packets have stagnated with wage growth falling behind inflation, despite UK unemployment being at a record low.

“It’s also worth noting that September’s inflation figure matters hugely to both retirees and savers. Under the government’s ‘triple lock’ guarantee, the state pension will rise in April each year by whichever number is the highest out of the September CPI inflation number, average earnings or 2.5%. With inflation running higher than either wages or 2.5%, this will be determine the rise in the State Pension next year, arguably making retirees the biggest winners from today’s inflation figure.

“September’s inflation figure is also used to determine how much investors and savers will be able to shelter in an ISA each year and by how much a number of benefits are increased in the new tax year, and in theory today’s number means welcome increases. However, expect all eyes to  be on Philip Hammond’s Budget Speech in late November to see if the Chancellor confirms the state pension and ISA allowance increase.”

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

“The pound in your pocket is depreciating, as the rising price of goods continues to chip away at its value. Consumer spending remains remarkably resilient in the face of inflationary pressures and weak wage growth, but the current squeeze on household budgets is a slow burner, as it takes some time for economic reality to hit home.

It’s important to keep some perspective however, and while consumers may be constrained, they’re not down and out. Employment remains high and borrowing costs are low, for the time being at least.

It’s worthy of note that inflation has been above this level for around four of the last ten years, and it’s really only since 2014 we’ve become accustomed to inflation running below the Bank of England’s 2% target. Meanwhile those who remember the hyperinflation of the 1970s will be wondering what all the fuss is about.

The tick upwards in inflation will increase expectations of a rate rise from the Bank of England later on this year, stoked by a flurry of hawkish rhetoric coming from Threadneedle Street. This wouldn’t be the first time the bank has talked the talk without walking the walk however, so it’s probably best not to count those chickens until they’re hatched.”

Viktor Nossek, Director of Research at WisdomTree in Europe, said:

“CPI inflation has reached the 3% mark for the first time in over five years, having last been at this level in April 2012. However, while it has reached a multi-year high, we expect inflation has effectively peaked in the UK.

“There has been much talk of a rate hike later this year by the Bank of England, but with so many areas of weakness in the economy, and high levels of indebtedness, a rate rise could be a step too far for the Bank of England, at least until there is more clarity on Brexit.

“The deciding factor could be the pound, but even here the outlook has become more benign, with the currency appreciating substantially off lows and acting as a dampener on inflation. While an eye-catching number, the real question is if beyond the peak, inflation will trend lower and be contained enough to sustain consumer spending. Against poor productivity, wages are expected to struggle to even keep up with lower inflation further out. ”

Nick Dixon, Investment Director, Aegon said:

“The Bank of England has hinted at an increase in interest rates in the coming months, sentiment likely to gain traction following today’s announcement that inflation has reached 3.0%. While there are signs of a slowing economy, with sterling still at risk as Brexit negotiations remain inconclusive the British economy remains vulnerable to further inflationary forces.

“These pressures could become embedded through increasing demand for higher pay – especially in the public sector – without the political will for matching tax increases.  Looser government spending will force monetary policy to take the strain, meaning higher interest rates which we believe are not currently reflected in market expectations.”

Alistair Wilson, Head of Retail Platform Strategy at Zurich, comments: “As inflation hits a five-year high and outstripping pay growth, further pressure is on the Bank of England to raise interest rates – now even more likely to be next month. This will be welcome relief for savers, but homeowners with variable and base rate tracker mortgages need to pay attention now if they haven’t done so yet: a rates hike will be a shock if unprepared for. Some lenders have already started pulling their record low mortgage deals, so prospective borrowers should try and take advantage now, and those already making repayments need to check what level of interest they’re paying and whether they could save money by switching to one of the more competitive deals on the market.

“For homeowners nearing retirement with a mortgage, they will need to consider whether to continue repaying it over the coming years, or clear the debt with a lump sum from their savings. With the potential rise, this is a question that may have to be tackled sooner rather than later.

“When it comes to basic budgeting, proactivity now will pay off: review spending habits and make the most of online calculators to understand the potential impact, and change saving plans accordingly.”

Robert Szechenyi, Investment Director at Rathbones, said:

“This period of rising inflation has left many facing a squeeze on their savings. Those savers with their capital predominantly held in cash will have seen its value depleted as the rate of inflation moves upwards. It is unsurprising that almost half of the UK savers we surveyed cited inflation as being the biggest threat to their wealth. And with over a quarter of savers surveyed already reporting a negative effect from the rise, action needs to be taken by savers and investors to combat the effects of rising inflation.

“Investing in the stock market, property or other alternative asset classes can be effective ways for investors to ensure their savings weather the storm of both a growing rate of inflation and political and economic uncertainty in the UK.

Matthew Brittain, Investment Analyst at Sanlam UK said:

“While far from being a watershed moment, today’s announcement that the rate of inflation has reached the 3% point does pile more pressure on already squeezed living standards. For people up and down the county, the pound in their pocket now feels a little less valuable. Inflation is now confidently outstripping wage rises, which have tended to be around 1-2%, meaning that people’s disposable income is in decline and many will have to take on more debt or save less in order to maintain their living standards.”

“Our view is that current levels of inflation are nothing to worry about – it’s simply a case of businesses passing on higher import costs, brought about by a fall in sterling, to their customers. Over the coming months, our expectation is that it will start to fall back to 2%, the level at which the Bank of England is mandated to maintain it. This view is not necessarily shared by the Bank of England, and today’s announcement makes an interest rate rise in November a near certainty as the Monetary Policy Committee takes action show they are keeping inflation under control.”

Emmanuel Lumineau, CEO at BrickVest, said: “The UK’s relative economic strength post Brexit has now waned as consumers begin to feel the impact of rising inflation. Higher interest rates should be coming for the first time in more than a decade. For the commercial real estate industry, higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices.

“We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market.”

Vince Smith-Hughes, retirement expert at Prudential, said: “Relatively high inflation figures give financial advisers an opportunity to help their clients understand how much income they can withdraw without running out of money.  Advisers tell us that many savers are unrealistic about how much money they need in retirement and two-thirds say running out of money is the biggest risk facing their clients. A comprehensive drawdown review using cashflow modellers will help clients understand how much they can drawdown without exhausting their funds. Using a modeller which also shows average longevity can really help to bring this to life. In addition having a robust mechanism to analyse future expected growth rates can help advisers determine what can be a sustainable income.”

Richard Stone, Chief Executive at The Share Centre said:

“The increase in inflation to 3.0% pushes the Bank of England Governor to the verge of having to write to the Chancellor to explain why inflation has deviated so far from the 2.0% target. In light of this, the prospect of action by the Bank of England at its meeting in November, to raise interest rates from their record low of 0.25%, seems ever more likely. I believe this is particularly the case following the Government’s, at least partial, abandonment of the public sector pay cap. Although increased inflation in the short term may be explained by the devaluation of Sterling following the Brexit referendum, more rapidly increasing wages could see that higher rate of inflation become baked into the system. This is notably something the Bank of England would be keen to avoid and hence a small increase in interest rates to indicate a preparedness to take action will be an important signal from the Bank.

“It should of course be remembered that such an increase would just reverse the step taken in August 2016 in the aftermath of the Brexit referendum, arguably just returning rates to the previous historic low that had persisted since March 2009 of 0.5%.

“While such a rate rise may be cheered by savers with cash deposits, I believe it is debatable the extent to which banks will pass on the higher base rate into deposit rates – given that the banks are already holding significant cash deposit balances. Anyone with a variable rate mortgage or other loan will though see repayments increase – albeit modestly. This will further squeeze the ability of the consumer to spend or save, at a time when real wages are falling again.

“For those trying to save and invest, the decline in real wages and the impact on disposable income available for saving or investment is stark. This is self-evident in the low savings rates seen at present and underlines why it is so important for Government to continue to encourage and incentivise savings and investment, particularly for younger savers, through initiatives such as auto-enrolment for workplace pensions and the Lifetime ISA.

“Ultimately this can though only be achieved by a return to real wage growth. This will occur through productivity improvement, which the UK has struggled with, rising wages (which should be paid for from increased productivity) and falling inflation. Rising wages may come with the end of the public sector pay cap, falling inflation may come through increased interest rates and the point at which the Bank of England decides to act is now undoubtedly imminent.”

Kate Smith, Head of Pensions at Aegon commented:

“This month inflation figures are uniquely important because they are used by the government to calculate the rise in the Lifetime Allowance (LTA) for the first time. The increase for the LTA in 2018/19 will be £1,030,000 based on today’s figures, and following a series of reductions it is welcome that the base-level is set to start growing again, even if on the surface the numbers aren’t large. Despite being small, this is a complex area, so those affected should seek financial advice to make sure their pension is protected from additional tax charges.

“This month also sees the state pension rise in line with inflation, under the triple lock guarantee. Today’s figures mean that weekly state pension payouts will rise from £ 159.55 to £164.37. This means that people will see their annual State pension income rise by £250. However, those on the old Basic State Pension will only see their State pension increase from £122.30 to £125.97 a week, giving an annual increase of only £191.”