Jeff Lewis, director at RobMac, takes a look at how inflation impacts financial markets and the future implications of the recent numbers.
We have had the latest UK inflation figures on Wednesday. We did get good numbers and now we are seeing a partial reverse with mortgage rates falling. I think we will see a steady improvement in the prospects for UK inflation and interest rates as the summer turns to autumn.
It is the role of sterling’s weakness last year which, given the lags could account for up to 2% of current inflation. That’s a lot and sterling’s recent strength means that the 2% boost is set to disappear and turn into a negative influence over the next year or so even if sterling merely maintains its current level. There are other favourable influences such as household energy bills. They will be up by 200% in this week’s figures but will be down by about 17% in July’s released next month and are likely to fall again in October.
But for a sustained fall in inflation, we need to see lower wage inflation – and that has been accelerating which the biggest worry however the latest figures have been inflated by April’s 10% rise in the minimum wage. The BoE has highlighted the importance of the 3-month annualised number but that isn’t just double counting, it’s quadruple counting. This may well have exaggerated fears in the market and more importantly, the labour market is easing, albeit from super tight levels. As headline inflation falls, wage pressures should ease, let’s hope that helps us see better industrial dispute agreements on pay.
Suffice to say there is room for optimism of what might be termed a soft landing for the economy and perhaps growth returns with inflation falling, all good for investment markets.
* The value of an investment may go down as well as up, and you may get back less than you originally invested.
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