This month saw another round of disappointing inflation data. It may provide another excuse not to invest in the UK economy.
- The CPI rose 10.1% year on year, driven by rising food prices
- UK inflation is increasingly out of step with the US and Eurozone
- The Bank of England has its work cut out to curb inflationary pressures
The latest ONS data shows inflation falling, but not by much. It is certainly not enough to reassure the Bank of England that inflationary pressures are on a reliably downward path. It also appears that the UK is diverging from other markets, with persistently higher food prices. While most investors recognise that the UK economy is not the same as the UK stock market, is it another deterrent for global investors?
Any hope that UK inflation would drop to single digits proved premature, with CPI data showing a rise of 10.1% year on year. The main culprit was food prices, which jumped over 19%, with bread and cereal prices reaching record levels. This offset the impact of lower fuel prices.
The figures put the UK out of step with the US and even with the rest of Europe, where inflationary pressures appear to be declining more persistently. The latest data from the US showed CPI inflation at just 5%, while Eurozone inflation is hovering at around 7%.
This gives the Bank of England far less flexibility than its peers on rate rises. Markets are now pricing in at least two further rate hikes – taking rates to 4.75%, with a commensurate rise in the cost of borrowing for households and businesses. The central bank’s original hope that inflation would dip to 2.9% in the second half of 2023 looks increasingly far-fetched.
It is yet another black mark for the UK economy and another deterrent to invest in UK markets, when there was precious little international enthusiasm anyway. It has also pushed the pound higher, which is a headwind for the UK’s international companies.
Jason Hollands, managing director at Bestinvest, says: “Continued higher borrowing costs, combined with negative real earnings and tax increases will together have a dampening effect on the domestic economy. This leads me to remain cautious on companies in sectors that are sensitive to discretionary consumer spending that can be put off as households further tighten their belts, as well as property where much higher mortgage costs are biting.”
It may also stall any revival in UK smaller companies. The sector looks cheap after a bad run and typically does well during an economic recovery phase. Plenty of investors are asking whether it might be the right time to reinvest, but this may give them pause for thought.
There will come a point when data on the UK starts to get better. At the moment, it appears that there is more pain to come. While the US and Eurozone may get their ‘soft landing’, the UK may not be so lucky.
