UK inflation figures for July. A round-up of the views coming into the IF Magazine office.
Jo Darbyshire, Commercial Director at Avalon, said: “Despite temporary dips, inflation continues on an upward path, adding to the pressure on incomes with basic pay expected to rise only by 1% over the next year. This makes saving more of a challenge across all ages, particularly with low interest rates providing little return, but inflation bites particularly hard for those already in retirement and living on fixed incomes. That said, a smart financial plan developed early on can help to cushion any financial shocks, even more so if this can identify methods to protect against inflation. Ensuring this is accounted for will allow far more flexibility, avoiding any mounting debt should the unexpected happen.”
Alex Marsh, Managing Director of Close Brothers Retail Finance, said: “Inflation remained above the target rate at 2.6% in July with a knock on effect on consumer spending, which stifled disposable income and forced Brits to tighten their belts. Coupled with the fall in real wages, July saw consumer confidence at rock bottom and left retailers in a vulnerable position as consumers were priced out of purchasing many of their desired products.
“Retailers also felt the pinch from the weak pound in July, as their own costs increased and they were left with the difficult decision of whether to absorb the costs or pass them onto the consumer. In order to help consumers feel they’ve got their spending power back, retailers can offer flexible payment options such as the ability to spread payments over time.”
Maike Currie, investment director for personal investing at Fidelity International, said: “The income squeeze on cash-strapped UK consumers continues with July’s inflation reading showing the CPI (Consumer Price Index) remaining at 2.6%. The main drivers behind this month’s food price inflation are a rise in the cost of bread and cereals, meat and fruit. However, this month the main focus will be on the RPI (Retail Prices Index) reading, as the July figure is used to determine by how much rail fares will increase in the new year. Commuters will face an eye-watering 3.6% increase in the cost of ‘anytime’ and season tickets in England and Wales in 2018, adding to mounting expenses.
“UK households continue to feel the squeeze as price rises continue to outpace earnings. Rising inflation coupled with dwindling wage growth means real wages are falling. In its August inflation report, the Bank of England pointed out that uncertainty over the economic outlook may be affecting companies’ willingness to raise pay, projecting that regular pay growth will remain subdued over the rest of 2017.
“The Bank expects inflation to fall back towards the 2% target during 2018 as past increases in fuel prices drop out of the annual comparison, but this will mean very little if our earnings fail to keep up with price rises.
“Over the longer term, expect rising inflation to be a fleeting occurrence due to a number of economic trends. First, an aging population limits the size of the global workforce, which by corollary suppresses economic activity. Meanwhile rising inequality and the growing cohort of self-employed people with limited earning power, such as Uber drivers in the ‘gig economy’, means less money is being spent.
“Less economic activity, and less money spent, means prices are unlikely to be driven upwards, keeping a lid on inflation over the long term.
“If inflation stays low and economic growth remains tepid, there is no reason for the Bank of England to risk the economic recovery by putting up interest rates any time soon. Good news for borrowers, bad news for savers and retirees and even more reason to turn your attention to the stock market and experienced stock pickers who can roll up their sleeves and use the resources and insight at their disposal to unlock those ever elusive returns.”
Ben Brettell, Senior Economist, Hargreaves Lansdown, said: “Last month’s unexpected fall to 2.6% raised hopes that UK inflation had peaked, as the Brexit-induced weakness in the pound started to fade.
“Today economists had predicted a slight uptick to 2.7%, but in the event CPI inflation held steady at 2.6%, with falling fuel prices counterbalanced by higher prices for clothes, utilities and food.
“It now looks quite possible inflation has peaked, and will fall back further incoming months. The year-on-year increase in producers’ raw material costs fell to 6.5% in July – undershooting forecasts for a 7.0% rise. This was down from 10% in June, the biggest month-to-month slowdown in almost five years. Input prices are a leading indicator for consumer price inflation as higher input prices are often ultimately passed on to the consumer, and therefore a lower number here could bode well for softer consumer prices down the line.
“All this is good news for the consumer, as it helps alleviate the continuing squeeze on household finances, though pay is still shrinking in real terms for now. Tomorrow’s labour market update is expected to show wage growth remained at 1.8% for the three months to July.
“It’s also good news for borrowers – moderating inflation means less pressure on the Bank of England to consider raising interest rates, and will allow the MPC to remove the sticking plaster of ultra-low interest rates very slowly indeed. With only two of the eight members voting for higher rates earlier this month, it seems even a return to 0.5% is some way off for now.”
Martin Palmer, Head of Corporate Market Management at Zurich, said: “Finances are under pressure from all sides. Despite holding steady today, we’re still seeing a cocktail of increasing inflation, low interest rates and low wage growth. If you add to that the impact of the increase in the new state pension age then it is becoming even more important for individuals to save for their retirement and for unforeseen events. As it stands, one in eight (13%) of UK adults would have to sell their home if they lost their regular income due to illness or injury, making it even more crucial that steps are taken to prepare both for any financial shocks as well as a life after full-time work. Smart planning can address both. Investing in a pension or a stocks and share ISA are among the best ways to prevent inflation eating away at your savings, while protection policies can cover a sudden loss of income. It may appear daunting at first, but taking steps to understand the options available will help to build a bespoke solution.”
Stan Russell, retirement expert at Prudential, said: “Inflation remaining unchanged is good news for retired people but financial advisers have a crucial role helping clients understand just how much they can withdraw from their pensions funds. Advisers say 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 their clients understand what level of income is sustainable in retirement.”
Peter Bradshaw, National Accounts Director at Pension Monster, said: “The high inflation rate does little to ease the pressure for consumers who have had to tighten their belts for the past few months and still face a further wage squeeze.
“Prices on this scale can make it hard for even the most financially savvy to plan for their future, so it’s important to review plans regularly to ensure they’re fully inflation-proofed.
“As a first step towards safeguarding your financial future, you can access a range of free online tools, like Pension Monster, which provide a clear and concise overview of your retirement options, including how much you should put aside to meet your retirement income goals.”
Kate Smith, Head of Pensions at Aegon commented: “Prices may not have jumped in the way many were predicting this month, but the upward trend of recent months has put pressure on UK households, hitting pensioners and those on a fixed income especially hard. The impact of inflation will be doubly felt by retirees this month, because they are more sensitive to price changes in energy and certain goods and services. While the price of motor fuel might be falling, household energy costs and the price of clothing and household goods are on the rise.
“In these turbulent times, it’s concerning that the effects of rising inflation are yet to register with much of the UK population. Two thirds of people have taken no steps whatsoever to protect their savings and investments against the erosive effects of rising inflation. Current expectations are that prices will still be growing rapidly by the year end, it’s so important that people take time to factor this into their financial planning, and talk to a financial adviser when possible.”
Shilen Shah, Bond Strategist at Investec Wealth & Investment, said: “The headline CPI print for July was somewhat weaker than expected at 2.6% – unchanged on the month as lower energy prices limited the increase over the period. CPI has probably not hit its peak, however a weak domestic backdrop suggests it will drop back soon after, with core service CPI supporting this thesis. From a monetary policy perspective, Sterling’s fall post the release of the data is another indicator that the Bank of England is likely to sit on its hands over the next few months, with Brexit related uncertainty also starting to limit economic activity and underlying inflationary pressures.”
Richard Stone, Chief Executive at The Share Centre said: “The flat headline rate following June’s fall and the underlying data, particularly with a downward contribution from fuel costs and the reduction in producer input prices, suggests inflation may now be nearing its peak.
“However, personal investors and consumers will continue to feel pain with negative real wage growth as wages continue to show only modest increases. House price growth has also slowed and the main contributors to inflation – such as the price of bread and other food items – will likely hit those on lower incomes hardest as a greater proportion of their income is spent on those staple items. In short, those looking to increase savings and investments and make greater financial provision for their futures will find it hard to do so in the face of increasing demands on their incomes as prices continue to rise faster than wages.
“The focus on the RPI figure – at 3.6% slightly above expectations and an increase from 3.5% in June – will add further pain for consumers who use services where prices are uprated by the July RPI rate. This specifically applies to rail fares and with wage inflation currently at about 2% this increase will be felt particularly hard by those commuting on a daily basis.
“For investors it will be interesting over the coming months to see what impact inflation and negative real wage growth has on consumer spending. Particularly, the effect that it may have on retail companies and their results. There is some evidence that consumer expenditure is moderating and that has led, in part at least, to the slowdown in headline growth for the UK economy in the first half of 2017. With real wages falling and particular price pressure coming from staple items in the consumers’ shopping basket, the reality is consumers simply have less to spend on luxuries and other items and less to save or invest – with the consequent impact on the savings ratio which is already at a low of 1.7% as compared to the average rate over a period extending back more than 50 years of more than 9%.
“This 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.”
Nick Dixon, Pension Director at Aegon commented: “After last month’s surprise dip, inflation remains above target, although it has not continued its upward march in the way many expected. While concerns about stagnant wages, anaemic economic growth, and a reliance on cheap debt remain, sustained above-target inflation is continuing to build the case for an interest rates rise in the not-too-distant future.”
“Such an increase would present new challenges, and new opportunities, for those owning investments whose valuations are linked with interest rates. All asset classes feel richly valued at present so we take a cautious view in aggregate, with particular concerns around fixed interest, real estate, non-sterling assets and US equities where valuations look particularly high.”
Viktor Nossek, director of research at WisdomTree in Europe, said: “Today’s reading will once again alleviate pressure on the Bank of England to start tightening. The trend has turned down recently amid a bout of stability for the pound and falls in commodity prices, and there is no sign of this reversing in the near term – indeed, inflation may well have peaked already.
“While goods like food crept up in price, supermarkets continue to absorb much of this into their margins, and as long as the underlying soft commodity prices do not rise significantly we should see this continuing.
“Therefore we think the outlook will be muted for some time. The official figure should stay well above 2%, but there is no additional driver to push it higher at present, and that is very good news for the Bank.”