Danni Hewson, Financial Analyst at AJ Bell:
“There’s no way to sugar coat what’s happening to prices. Pretty much everything is significantly more expensive than it was a year ago and there is every indication the situation is just going to get worse.
“I don’t think anyone will be surprised to learn that the price at the pump played a huge part in the March story, petrol prices were up by more than 12p a litre in a single month, diesel by more than 18p. Motorists winced every time they had to fill up their vehicles and the Chancellor’s duty cut has done little to soothe. Russia’s invasion of Ukraine has clearly played a part as real sanctions or those self-imposed, disrupted supply of oil and sent the price of a barrel of the black stuff soaring.
“Energy prices sky-rocketed too and though October’s price cap kept the worst of it in check for households’ – manufacturers, retailers, pretty much all businesses weren’t cushioned in the same way and those prices are being passed on to the consumer leaving them with difficult choices to make. And even with the price cap the cost of keeping the lights on and the home fires burning have increased, but then what hasn’t.
“Records have been breaking everywhere and the phrase “since the series began” is used over and over again in this latest update. Clothing and Footwear up 9.7%, furniture and household equipment up 10.4% and the price of doing anything nice be it enjoying a drink in the pub or taking in a show – you guessed it up by the fastest rate since the series began. Buying those things are a choice, unless you’ve got growing kids, but putting food on the table is not. Whilst the 5.9% surge isn’t quite a record breaker I doubt anyone visiting the supermarket over the next couple of days will be worrying about the distinction.
“But what’s causing most concern is the realisation that this really is just a taste of what is to come. The next set of inflation figures will reflect the shock most households have been feeling when they’ve taken a look at their new energy bill. And taking a look at the latest Producer Price Index figures there is unlikely to be any respite pretty much anywhere else. Input prices have surged by almost 20%, and if you’re keeping a tally, yes that is the highest number since records began. What’s coming out of the factory gates, the goods produced seem positively cheap by comparison but be in no doubt the near 12% hike will just add to the misery being faced by households and businesses right across the country.
“And that chip shortage, the dearth of semi-conductors which was the hallmark of post pandemic recovery has suffered another setback, a setback which is likely to further contribute to the incredible prices being sought for second-hand cars. Not only will the issues created last year – the lack of one year old vehicles coming to market continue, but with new car production still subdued transport costs are expected to feature in a similar way in the next chapter of the inflation story.
“There are no quick fixes, no magic wand to be waved. Everybody is going to feel poorer as wages, pensions and benefits all fail to keep up. But most people also understand that those with the least will be hardest hit because for some people cutting back is simply not an option.”
Paul Craig, Portfolio Manager at Quilter Investors, says: “Last month’s Spring Statement did little to quell the fears of those already feeling the squeeze financially, and the introduction of the new energy price cap and the national insurance increase has further increased the pressure. With wages failing to keep up and pensions not rising by a similar amount, things are going to get tough for a lot of consumers.
“Alongside the Bank of England’s most recent interest rate hike came the prediction that inflation would hit 8% later this spring. The Bank has underestimated the extent of inflation in previous forecasts and given this month’s increase, there could be even worse to come than previously feared.
“The Bank of England is looking more and more as if it is on the back foot in this fight against inflation. While trying to remain coordinated with other central banks, it appears they may have been too late in tightening monetary policy conditions and subsequently inflation has spiralled out of control. With the delicate market environment owed to both rising inflation, the uncertainty surrounding Russia’s war on Ukraine and now severe lockdowns in China, we could easily see inflation rise above the BoE’s forecasts. Investors will need to continue to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency remain key.”
James Lynch, Fixed Income investment manager at Aegon Asset Management, comments: “The split of inflation is important: goods inflation is running at 9.4% and service inflation at 4%. Of course this print is heavily influenced by supply chain issues on the goods side and high energy prices (which are going higher), but service inflation is likely to be closer to the longer-run inflation we could expect once we get through the peak in energy.
“For the BoE, what does this mean? I suspect they thought like most an upside surprise was more likely than not, and it nails another 25bp increase in May to take policy rate to 1%. After that it becomes a judgement call by the MPC of where the neutral policy setting rate is and how far into tight policy they want to take it. The market is pricing nearly 0.25% rises at the next six meetings. Going on previous MPC communication, this seems a bold prediction by the market – it would take quite a hawkish shift for this path to be realised.”
Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, adds: “The rate of inflation is running at the highest level in 30 years, due to large increases in the cost of energy, housing and transport. The figures will add further pressure to the Bank of England to accelerate the pace of interest rate increases, even though the growth outlook has deteriorated in the past few months. The significant increases in the cost of living, the national insurance hike and interest rate increases have started to affect consumer demand and sentiment and the economic outlook looks darker than it has for some time. The war in Ukraine has extended the runway in terms of inflation staying high but a large part of the inflation continues to look transitory in nature and we would caution against raising rates too aggressively. The Bank of England has a difficult balancing act ahead of them and we hope that inflation can be tamed without harming the economy too significantly.”
Ben Laidler, Global Markets Strategist at social investing network eToro, concludes: “The UK is far from alone seeing surging inflation, but the consumer ‘cost-of-living’ squeeze is being almost uniquely worsened by both higher taxes and interest rates. This may be necessary short-term medicine but means the pressure on the UK consumer has further to go.”
