Many investors had believed inflationary pressures were easing; the latest UK inflation figures are a nasty surprise.
- UK inflation jumped from 10.1% to 10.4%, while core inflation increased from 5.8% to 6.2%
- Food inflation was particularly acute, with prices rising 2.1% in a single month
- Growth assets have rallied since the start of the year, but this may be under threat
In recent months, investors have increasingly allowed themselves to believe that inflation is on a one-way path lower. With energy prices falling, wage growth under control and supply chains bottlenecks easing, it appeared that price pressures were easing and a pivot on interest rates was imminent. Against this backdrop, the latest UK inflationary figures have come as a shock.
There had been expectations of further declines after three consecutive months where the rate of inflation had fallen. Instead, inflation jumped from 10.1% to 10.4%, while core inflation increased from 5.8% to 6.2%. Food inflation was particularly acute, with prices rising 2.1% in a single month. Food prices are now 18% higher than a year ago.
It may prompt an abrupt end to speculation that the Bank of England might pause or even cut rates in the wake of the nascent banking crisis. The UK’s central bank appeared to be wavering on a rate rise at its March meeting, but this news makes a 0.25% hike look inevitable. There has been a small spike in 10 year bond yields as a result – from 3.37% to 3.47% - while 2-year bond yields have risen even more – from 3.27% to 3.46%.
A broader question is whether this, along with an expected rate rise in the US, will dent the emerging rally in growth assets. Value managers have been fond of saying that 2022 was not a one-off, and the valuation differential between value assets and growth assets is still extreme. However, markets aren’t so sure.
Growth has outpaced value notably since the start of the year. While commentators have been busy pronouncing the death of the global technology sector on the grounds of its cyclical revenues and regulatory hurdles, Meta’s share price has quietly gained 62% for the year to date. Amazon is up 17%, Tesla is up 83% and Alphabet is up 18%.
While this can’t all be attributed to interest rates, the growing expectation of a pivot on interest rates from the Federal Reserve has certainly helped. Value strategies have been hurt by the fall-out on the banking sector and from some normalisation of energy prices, but shifting interest rate expectations have also been a factor in their weakness.
It will be interesting to watch whether this latest round of inflation data and the dawning realisation that central banks will stick to their word on rate rises changes the market mood. It has been all-go for growth in the early months of this year, but value may find its feet again.
