Surprise, surprise! What are the implications of today’s shock inflation data? The industry reacts

by | Sep 20, 2023

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For once, there’s some relatively good economic news as the Office for National Statistics (ONS) has today announced the latest UK CPI inflation data. It reveals that prices have risen by 6.7% in the year to August. The all important core inflation data also came in lower than expected at 6.2% compared to 6.9% last month. Good news. These latest UK inflation figures have surprised markets which were generally expecting inflation to be higher. Of course, prices are still rising, just not as fast as they were, so the good news needs to be tempered somewhat.

Clearly, this data has implications for tomorrow’s Bank of England MPC meeting, and the interest rate decision they come to. Consensus has been that a 0.25% rise was almost a dead cert – but will that change now? Especially as the oil price is continuing to rise?

Experts from across the financial services industry have been sharing their reaction to today’s inflation data with us here at IFA Magazine as follows:

Commenting on the data, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:

“UK Inflation, as measured by the Consumer Price Index including housing, came in, surprisingly lower at 6.3% from the 6.4% recorded in July 2023. With global oil prices nearing the $100 mark, it was expected that inflation prints would be higher. Higher transport costs were offset by the slower increases in food prices, at 13.6% (vis-à-vis 14.9% in July 2023). While this lower print in headline inflation will come as a welcome relief for the Bank of England as it prepares for its interest rate decision, the details behind the headline numbers still remain of concern. Housing and utilities price growth was higher than in July, indicating the impact of higher interest rates on the housing market as well as the general economy. Though food prices came in slightly lower, whether this has been caused by changing consumer patterns remains to be seen.”

 
 

Sebastian Vismara, financial economist at BNY Mellon Investment Management comments: “The unexpected fall in UK headline CPI inflation from 6.8% in July to 6.7% in August (vs BoE and consensus at 7.1%) will be of great comfort for the Bank of England. Most importantly, core CPI inflation fell even more sharply from 6.9% to 6.2% (consensus 6.8%), and services inflation declined from 7.4% to 6.8% (vs BoE at 7.2%). The BoE sees the latter as key to judge the persistence of domestic price pressures. 

“We think the BoE will still hike interest rates by a further 25bps to 5.50% tomorrow. This could be the last hike given the recent loosening in the labour market and weakening in activity, but we think that risks for rates remain to the upside in the near term. UK wage growth data keeps surprising to the upside relative than the Bank’s forecasts, and core inflation remains high and has been very sticky, at least until recently. Energy prices have surged in the past few months and could increase further. The global economy has been weakening since the last quarter, but not by enough to create much slack. In other words, there remains the risk that this easing in core inflation proves to be another false dawn, and that today’s fall stalls or even reverses in the coming months. The BoE is likely to want to see broader disinflation trends in play before ending its hiking cycle.”

Jonny Black, Chief Commercial and Strategy Officer at abrdn, Adviser, said: “Falling inflation is good news, but it makes it more important for advisers to explain to clients that this does not mean prices are coming down – it just means they’re increasing more slowly.

 
 

“The Bank of England can’t rest on its laurels just yet as inflation and interest rates remain a complicated balancing act, and eyes are now fixed on tomorrow’s Monetary Policy Committee decision and its impact on people’s finances.

“These are uncertain and challenging times, but that shouldn’t mean considerable changes in client strategies. The support of an adviser will be critical to keeping clients firmly focused on their future goals, and avoiding any steps that could prove damaging in the long-term.”

Derrick Dunne, CEO of YOU Asset Management, commented: “Falling inflation is an unexpected, but positive, surprise. But wages are what we should be worrying about. Rather than breathing a sigh of relief, we can expect The Bank of England to continue dwelling on last week’s disappointing round of market data ahead of tomorrow’s interest rate decision, which caused headaches all round.

“The key issue was higher-than-expected average pay, which will most certainly be considered inflationary, while weaker-than-expected GDP data suggested past rate rises are already beginning to have ramifications for the economy. The challenge for Andrew Bailey then, as it is for most central bankers, is the fine balancing act of using interest rate changes to adjust spending habits to control inflation, without triggering a recession.

“Inflation still hasn’t gone away either, so the champagne should be kept on ice. With the spectre of inflation still lurking and an economy that seems to be running out of steam, investors are unable to rely on any one outcome. This means an open mindset and a well-diversified portfolio remain the best ways to prepare for any changes in the months ahead.

 
 

Adam Oldfield, chief revenue officer at Phoebus Software, says “There was a lot of speculation ahead of today’s announcement and mostly in the opposite direction.  Although the fall in the inflation rate is small, we have to take some comfort that it is at least in the right direction, especially given the global rate of inflation.

“This, along with the hint from the governor that the Bank of England may not have to increase interest rates this month while inflation is falling, could be the news many have been hoping for.  Tomorrow’s MPC decision will be one we wait for with baited-breath.  However, mortgage rates have already been coming down but the dilemma regarding fixed rates is still one that is not easily answered.  For a huge number of borrowers, the amount they are now paying for their mortgage is the highest it has been and managing monthly payments is no doubt a worry.  This is reflected in the increase in arrears, which is a problem that lenders will have to manage carefully.”

According to Tomasz Wieladek, chief European economist at T. Rowe Price, the inflation surprise points to one final BoE hike as he comments:

 
 

“UK CPI inflation rose by 6.7% in August, a small drop relative to the 6.8% seen in July. However, the devil is in the detail. Core CPI inflation fell sharply from 6.9% to 6.2%, while services CPI inflation fell from 7.4% to 6.8% – as a result of a significant drop in accommodation services inflation. Core CPI inflation and services CPI inflation – which the Bank of England (BoE) considers the most relevant measures of underlying inflation – fell significantly, which has important consequences for the BoE meeting tomorrow. 

“The BoE has faced different types of surprises since its August meeting. AWE and pay growth continued to surprise to the upside, with July pay growth of 8% against an expectation of close to 7%. Wage pressures are the most important determinant of medium-term inflation and are still surprising the BoE to the upside. 

“On the other hand, the unemployment rate has started to rise above what the BoE expected and a number of other survey indicators, such as the RICS housing market survey and the CBI retail survey, suggest the real economy is likely sliding into recession. Therefore, the real economy data will become markedly weaker in the coming months. 

 
 

“The BoE will have to trade off these data surprises. I expect the debate at tomorrow’s meeting to be particularly heated. Although near-term inflation dynamics are looking better, and the weakness in demand demonstrates the monetary policy transmission mechanism is working, the medium-term inflation outlook likely worsened since August due to higher pay growth surprises. 

“Given this news, I expect the BoE to reach a compromise. It will hike by 25bps but also indicate this is probably the last rate rise in the cycle. There are risks the BoE remains on hold. However, whatever happens tomorrow with the policy rate, I believe the BoE will accelerate its QT programme.”

Becky O’Connor, Director of Public Affairs at PensionBee, commented: It’s good news that price inflation is heading down, especially when a slight rise was expected, but this is unlikely to be enough to stave off another rate rise from the Bank of England. Slightly lower inflation is unlikely to make people feel more comfortable with their household budgets, as we head into Autumn and the season of higher energy bills. 

 
 

Those facing higher mortgage rates or rent bills, or who have not received an increase in their wages in line with the average of 7.8% in the year to July, may feel less able to cope with still relatively high ongoing inflation. Having the ability to save or invest regularly may come down to whether someone is paying rent or a mortgage or has experienced a pay rise. For many, saving for the future remains on the back burner, while meeting short term living costs remains challenging.

Anyone who currently has money spare at the end of the month to save could benefit from higher interest rates from savings accounts, or make the most of their ability to put more money aside for the future in pensions and ISAs. Tax relief on pension contributions remains a great, unique ballast against the impact of inflation on a pension pot. “

Commenting on State pension implications, O’Connor said: “For pensioners, it looks almost a dead cert that the state pension is set to rise in line with earnings rather than inflation next April, as the triple lock dictates that it increases with whichever is the highest of earnings, inflation or 2.5%. That’s unless the Government chooses to break or manipulate the lock to make the rise more manageable to the public purse.”

 
 

Mohsin Rashid, CEO of ZIPZERO, said: “While today’s small drop in inflation is a step in the right direction, it remains worringly high. Indeed, in the eyes of consumers, it translates to many more months of struggling to afford essentials. Crucially, cut through the data and we see that food price inflation remains at double-digit, eye-watering levels, and this is an unavoidable expense for households across the UK.

“Despite signs that cost-of-living crisis might be easing, the current level of inflation remains an albatross around the neck of consumers. It is difficult to make plans for the future when being able to feed your family is something you have to worry about, and after more than a year of cost cutting and bargain hunting, those who are struggling must be tired of waiting for normality to return.

“Consumers are long overdue a break: it is time for the government and businesses – especially retailers – to get serious about supporting families with untenable grocery bills. Supermarkets must do more to offer shoppers meaningful savings on their weekly shops, and the government needs to be more vigilant about protecting those shoppers from being taken advantage of. Things are not improving fast enough, so we must act to ensure people in need are not left behind.”
 

 
 

Lily Megson, Policy Director at My Pension Expert said: “Unexpected easing of inflation might sound optimistic on paper. But savers still face uncertainty.

“One thing is for sure, however: in the coming months, pension planning will be far from plain sailing – support is urgently required.

“To help savers successfully navigate these choppy waters, the government must work with financial providers to ensure the right support, such as access to independent financial advice and reliable educational resources, is readily available. Such tools can have a profound impact in helping savers gain a better understanding of their financial situation, empowering them to stay on track with achieving their hard-earned retirement aspirations.”

 
 

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “A small and unexpected bonus, given much of the reporting beforehand was that we were in for a slight uptick in inflation. Nevertheless, today’s data illustrates how far we still have to go before cost-of-living pressures ease on UK households.

“With inflation remaining stubbornly high, the money most people have in savings is losing value in real terms. Even though interest rates have risen notably since the end of 2021, and may again tomorrow, millions are not seeing any significant benefits from this. This is because too many banks are still failing to pass better rates onto customers, particularly where easy access and current accounts are concerned. “Given inflation is proving sticky, and the base rate could rise again as a result, it is important people consider the best ways to save their money. This means looking at different savings products – such as fixed-term accounts – and shopping around for the best deals on the market.”

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