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UK inflation rises to 9.1%: What are the experts saying?

The latest figures published this morning by the ONS reveal UK inflation rose to 9.1% in May, up from 9% in April. Following on from this, investment and finance experts share their thoughts:

Daniel Casali, Chief Investment Strategist at Evelyn Partners, the leading integrated wealth management and professional services group created from the merger of Tilney and Smith & Williamson, comments:

“UK May annual headline CPI inflation was reported at 9.1% (consensus: 9.1%), the highest rate since the series began in 1997, versus 9.0% in April. The CPI monthly increase was +0.7% (consensus: +0.6%), compared to +2.5% in April. May annual core inflation (excluding food, energy, alcohol and tobacco) was 5.9% (consensus: 6.0%), versus 6.2% in April, with the monthly increase +0.5% (consensus: +0.6%), compared to +0.7% in April.

“Despite the modest deceleration in core CPI inflation and recent weakening economic activity in the latest monthly GDP stats, money markets have priced-in that the Bank of England’s Monetary Policy Committee (MPC) will still raise interest rates by 0.5% points at the next three meetings (4 August, 15 September and 3 November). If realised, the BOE current base rate of 1.25% would rise to 2.75% by November and to around 3.6% over the next 12 months. Higher UK interest rates are supported by three factors.

“First, the BoE forecasts CPI inflation peaking above 11% in October to reflect the rising cost of energy and a broadening out of price increases in other sectors. As such, the BOE is set to maintain a hawkish tone and particularly as wage rates are at the high end of the historical range. Essentially, the BOE wants to prevent a wage-price spiral that could make it more difficult to control inflation from becoming entrenched in the economy.

“Second, surveys of near-term inflation expectations continue to remain elevated. The YOUGOV household survey of CPI inflation over the next 12 months is close to a record high of 6.1%; however longer-term inflation expectations are about 2% points lower. The BOE is conscious that inflation expectations have become de-anchored, at least in the short-term, from 2% targeted inflation.

“And third, businesses have signalled their intension to raise wholesale prices to their highest level since 1989 in the latest CBI industrial trends survey. Retail price expectations do seem to have peaked, but they remain very high from the historical data. Given the lingering supply-chain disruption from the pandemic globally (e.g. China still maintains a zero Covid policy) on driving up goods’ prices, the BOE is essentially relying on a self-correcting erosion of real income from the rising cost of living to restrain domestic activity to match demand with supply.

“In terms of the investment implications, given the backdrop of high inflation and rising interest rates, it would be prudent to pick UK stocks and sectors that are less negatively affected by rising interest rates. These includes energy and material stocks, which trade on historically low valuations.”

Sarah Pennells, consumer finance specialist at Royal London, says:

“UK consumer prices hit 9.1%, widening the gap further from the Bank of England’s 2% target. It was hoped that the surge in prices last month was down to the household energy price cap feeding through, and things had settled, at least until October’s price cap rise.

“As it is, the battle to keep inflation in check isn’t succeeding despite a fifth consecutive rise in interest rates last week, designed to discourage spending and borrowing and encourage saving. That could be optimistic considering 58% of UK adults said last month that day to day costs, like paying bills and for food, was currently their top financial priority.

“The pressure from increased costs means people have already adjusted their spending in order to cope with the cost of living squeeze. The worry is prices will continue to rise to 11%, later this year, which will put further pressure on many people’s budgets.”

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