January was a challenging month for UK investors who had to contend with intensifying inflationary pressures alongside the prospect of higher UK and US interest rates and the possibility of a Russian invasion of Ukraine.
- Consumer price inflation surges to 5.4%
- Rate increase widely expected
- The UK economy rose above its pre-pandemic level in November
Macroeconomic and geopolitical worries: January was a challenging month for UK investors who had to contend with intensifying inflationary pressures alongside the prospect of higher UK and US interest rates and the possibility of a Russian invasion of Ukraine. Over January as a whole, the FTSE 100 Index rose by 1.1%, while the FTSE 250 Index fell by 6.6%.
“The rate of inflation is expected to continue its climb as energy bills rise”
IMF cuts its UK growth forecast: the International Monetary Fund (IMF) issued a warning about the impact of supply constraints and rising prices on UK households. The IMF downgraded its forecast for UK economic growth this year from 5% to 4.7%, although this remains the highest forecast for 2022 amongst the G7 economies. The UK economy grew by 0.9% month on month in November to rise above its pre-Covid level for the first time. However, this growth does not yet reflect the impact of the widespread Omicron variant of the Covid-19 virus and the subsequent imposition of the Government’s “Plan B” measures.
CPI hits 29-year high: the UK’s rate of consumer price inflation rose from 5.1% year on year in November to 5.4% in December, representing the fastest increase in prices since March 1992. Inflationary pressures were stoked by higher prices for food and energy; looking ahead, the rate of inflation is expected to continue its climb as energy bills rise.
Headwinds for the retail sector: retail sales volumes fell by 3.7% month on month in December as the Omicron variant discouraged shoppers from visiting physical stores. Looking ahead, the British Retail Consortium (BRC) warned that customers will face “strong headwinds” this year, citing the impact of higher National Insurance contributions and surging energy prices alongside rising inflation that will curb consumer demand while driving up costs for businesses.
2021 was a year of two halves for profit warnings: UK listed companies issued 203 profit warnings over 2021, according to a study by EY-Parthenon. As a whole, this was the second-lowest total in 22 years; nevertheless, 2021 was a year of two halves in which companies reported record low warnings in the first six months of 2021, followed by a 50% increase in warnings during the second half of the year. 44% of the companies that issued profit warnings alluded to supply chain disruptions, while 27% blamed higher costs and overheads.
To view the series of market updates through January, click here
