Today’s news from the Office for National Statistics (ONS) that UK inflation has returned to double digits with a 10.1% rise over the year to September has not come as a surprise to many marketwatchers.
This figure is up from the 9.9% figure in August, and means that inflation has returned to July’s 40 year high. However, this month has particular implications for the state pension and many DB schemes, which are traditionally set using the September data.
Clearly, today’s inflation figure shows clearly that the cost of living crisis is set to bite even harder into consumers’ and business’ budgets this autumn.
Of course, the 10.1% inflation is an average figure, with one of the stand out elements within it being a 14.6% rise in the cost of food and non-alcoholic beverages over the year to September.
What are marketwatchers saying about today’s data?
Kirsty Watson, chief operating officer, adviser, at abrdn said: “This news will be the latest note in a cacophony of economic announcements to concern clients.
“With inflation now back in double digits, they’ll be turning to their advisers for help understanding what the rise means for them, and how best to protect their money and pursue their financial goals. They’ll particularly value advisers’ support in making sure they’ve reviewed every part of their financial planning. This includes areas that may not be front-of-mind, such as inflation-proofing any long-term saving strategies for children or grandchildren.
“It’s increasingly important that firms consider the impact of inflation on their operations amid a rising cost of doing business, higher interest rates and market volatility. Many management teams will already be in planning mode for the new year, but they can’t wait until then to take any necessary steps to protect their commercial performance.”
According to Jeremy Batstone-Carr, European Strategist at Raymond James, now is the “time for calm” as he calls for an end to the “see-saw policymaking” which has “destabilised the economy” commenting:
“Political wrangling has poured fuel on the fire blazing in the financial markets, but today’s inflation data reminds us that the economic spark that ignited it originated outside Westminster. There’s not much that policymakers can do to solve the underlying problem of energy scarcity in the short term, but making the right noises will go a long way to calming markets. What we need now is clear, considered, and calmly delivered fiscal and monetary policy, that works in harmony to pour cold water on inflationary pressures, while not pulling the plug on economic growth.
“The Government’s utility price freeze is a step in the right direction, and will take the sting out of energy bills for millions of households this winter. However, by putting pounds back in the pockets of all consumers, some of whom are also seeing strong wage growth, a blanket freeze always threatened to indirectly lead to demand-pull inflation. Jeremy Hunt’s decision on Monday to end the ‘electric blanket’ energy price freeze is welcome news, and should address this risk head on next year.
“The Bank of England will still have to raise rates on the 3rd of November if it hopes to restore a semblance of stability to the UK market after recent see-saw policymaking. It is likely the base rate will now peak at around double the current level of 2.25% as the Monetary Policy Committee joins Jeremy Hunt’s campaign to prove that the UK does in fact play by the rules of economic orthodoxy.”
Marcus Brookes, chief investment officer at Quilter Investors comments: “Inflation in the UK has once again returned to above 10%, as August’s reading of 9.9% turned out to be a temporary blip. There is still some way to go in this inflation journey too given the Bank of England expects it to still go higher from here. Rising food prices continue to have a significant impact and were the primary reason for the increase, while the continued fall in the price of motor fuels made the largest, partially offsetting, downward contribution.
“As we head towards the winter and demand for gas increases, we will begin to see higher energy bills really come into play. While Prime Minister Liz Truss’ energy plan means they are capped at £2,500 for now, it has been made very clear that this iteration of government support will not be in place for as long as was once promised, and this could well have a knock-on effect on inflation. The dip in inflation seen in August appears to have been a fluke, and with the rapidly changing environment we are currently living in we are unlikely to see inflation fall for some time yet.
“One thing this will not have done is caused the Bank of England to reassess its approach to interest rates. It may be satisfied by the moves made in Westminster for now, but in the coming weeks, we will see what it really makes of the government’s fiscal policy as it makes its next move at its November Monetary Policy Committee meeting. This is just a mere few days after the OBR is due to update its forecasts on October 31st, so more volatility in the market is expected.
“However, the fact that the new Chancellor, Jeremy Hunt, has swooped in and reversed almost all of the costly changes announced at Kwasi Kwarteng’s mini-budget could go some way to help and the Bank may opt to dial down the hawkish rhetoric for now. That said, today’s news shows inflation remains stubbornly high and likely means the Bank feels it has no choice but to take decisive action with a 75 basis points hike.”
Andrew Aldridge, Partner at Deepbridge Capital, said: “While inflation has crept down since the record highs we saw this summer, 10.1% is still an eye watering figure for consumers and businesses alike. Investors and financial advisers face tougher than ever public markets due to recent political and fiscal turmoil. We see venture capital as an alternative investment that offers steady long-term growth opportunities, with unrivalled tax reliefs available via the Enterprise Investment Scheme, short-term tax planning can support longer-term growth opportunities.”
Lewis Shaw, Founder and Mortgage Expert at Shaw Financial Services comments “Inflation running at double figures is the one thing the Bank of England didn’t want to happen. This means more pain coming down the line. Market expectations are for the base rate to hit 5% by May next year. If that happens, we could see mortgages even higher than now. While fixed rates don’t correlate with bank rate, they tend not to be a million miles out. For savers, hopefully they’ll start to see some return for the first time in over a decade, however, the evil that is high inflation will still mean they’re losing purchasing power in real terms. We really need strong monetary policy to tame the inflationary beast, because it makes everyone poorer.”
John Glencross, CEO and Founder of Calculus, said: “Energy prices and the cost of goods and services have pushed September’s consumer price inflation back into double digits – the highest it has been for forty years -where it is likely to stay for the rest of the year. After a slight reprieve in August thanks to lower petrol prices, the last quarter of 2022 will continue to see inflation increases in food, energy, and labour as the UK gets to grips with the cost of living amid extreme economic uncertainty.
“The Chancellor’s evisceration of the mini budget has helped calm markets in the short term, but the important and tough financial decisions that must be undertaken in the longer term will undoubtedly hit the pockets of businesses and consumers alike. We were happy to see continued governmental support of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs), which empower entrepreneurial innovators and gamechangers to grow the UK’s businesses of the future.
“Calculus launched the first approved EIS fund 23 years ago, and we have invaluable experience supporting UK companies in the fastest growing sectors as well as providing innovative and tax efficient venture capital investment products for investors.”
Samuel Mather-Holgate, IFA at Mather and Murray Financial comments: “Items other than energy and fuel are pushing up inflation and this isn’t good news. The theory of transitory inflation is out of the window as food pushes up the cost of living. This most likely means inflation will be higher for longer than expected. The Bank of England will have to push interest rates much higher at their meeting at the beginning of November, and this means still higher mortgage rates.”
Dominik Lipnicki, Director at Your Mortgage Decisions Ltd. paints a bleak picture for savers and borrowers as he comments “The higher than expected inflation figures spell more doom and gloom for borrowers, as the Bank of England is under even more pressure to increase their base rate when its Monetary Policy Committee meets on the 3rd of November. That said, there are no winners here as even savers are on a hiding to nothing given the level of inflation.”