Rachel Winter, Partner at Killik & Co. comments: “UK inflation has hit 9%, surging ahead of last month’s 30-year high of 7%.
“These are the first figures to include the huge jump in the consumer energy price cap, and they put the spotlight on the government to draw up a long-term plan to tackle the cost-of-living crisis.
“Many households are struggling to stay afloat as they face the biggest squeeze on consumer finances since the 1970s. With the economic outlook increasingly gloomy, the prospect of a recession is becoming more real. Arguably, the stock market has already priced in this risk.”
James de Sausmarez, Director and Head of Investment Trusts at Janus Henderson said: “High inflation burns through all the cash savers have built up, and with prices continuing to rise at pace, those that bury their heads in the sand are going to be the hardest hit.
“British people are quite simply neglecting their futures by leaving such vast amounts languishing in cash. People saving for the long term, for example for retirement, must look to asset classes that can protect their savings from inflation and provide real growth too.
“The UK’s households are sitting on cash savings worth a year and a half of the nation’s entire annual spending. This is very worrying. If they simply kept a prudent 3 months’ income on deposit to cover contingencies, savers could release up to £1.5 trillion and opt for investments, like investment trusts, that have historically delivered far superior returns. Investment trusts can offer not only a superior income compared to cash, but they have also delivered capital gains too. Crucially, shares have an important element of built-in protection against inflation because many companies are able to increase prices and protect their profits when the cost of living is rising, and this flows through to the dividends they pay shareholders. Cash, by contrast, sees its true value gradually evaporate when inflation is so much higher than interest rates.”
Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, comments:
“The multi-decade high inflation rate indicates that the UK continues to face supply-driven “exogenous” price shocks. These are linked to events occurring abroad, rather than being led by demand, and is evident in energy, food and traded goods (e.g. car) prices. For instance, lower capital investment in fossil fuels to enable net zero transition and Russia’s invasion of Ukraine have constrained energy supply to raise crude oil and natural gas prices. Higher energy prices have also filtered through into food production and transportation costs, which are then passed on to consumers. Meanwhile, a weaker sterling exchange rate has lifted the cost of tradable goods prices.
“So far these “exogenous” price shocks have been found in higher short-term consumer inflation expectations, rather than over the long term. According to the April You Gov household survey, UK annual inflation expectations over the next 12 months are up to a historic high of 6.0%, but the 5 to 10-year expectation is running at a lower rate of 4.2%. Market rates of inflation expectations derived from inflation-linked bonds also exhibit a similar message.
“Importantly, the tightening labour market does not show the UK is entering a 1970s style upward wage-inflation spiral. While workers are demanding (and getting) higher pay to compensate for a rising cost of living, it is not running away, yet. In the three months to March, total average weekly earnings for the whole economy rose 7.0% from a year ago on a 3-month moving average, higher than the 20-year average of 3%, but it is down from the COVID-led peak of 8.8% in June 2021. Moreover, if bonuses are excluded, regular pay rose by a slower annual rate of 4.2%.
“Nonetheless, given upside inflation risk, the Bank of England is still likely to tighten monetary policy further from here. This increases the probability of slower UK output growth in the quarters ahead. Given this risk, it probably makes more sense to tilt towards large cap UK stocks linked to global growth, like the energy sector, rather than owning domestic-focused stocks. ”
Derrick Dunne, CEO of YOU Asset Management, commented: “Double-figure UK inflation is now in sight as the CPI made a record jump of 2.0 percentage points in April, led by the rise in energy bills and household goods and services. Now at 9.0% and well above the already damaging 7.0% seen in March, this is estimated to be the highest level since 1982 and shows little indication of losing momentum yet.
“The news isn’t good for savers and consumers – and is likely to get worse before it gets better. In the US, inflation has at last shown signs of slowing, which gives hope that we may see a peak soon here as well. But in the meantime, questions will continue to be asked about the Bank of England’s handling of the crisis and whether its rate hikes have gone far enough.
“With economic growth already reversing, the Bank’s determination to avoid plunging into full-on recession by hiking too aggressively is understandable. But with standards of living already suffering and with rising wages beginning to create a vicious inflationary cycle, it is clear that we’re already deep in troubled waters.”
For Robert Alster, Close Brothers Asset Management CIO, the key question is how employers respond as he comments:
“In the current environment, talent has proven hard to attract and hard to retain, but a persistent period of very negative wage growth could put discretionary consumption under pressure, giving employers pause for thought. But if employment holds up and wage growth accelerates, consumers may be more willing to spend savings and raise credit to support consumption. The Bank of England is assuming consumers remain cautious, which would mean limited further tightening, but the risks are to the upside in our view.”
Kevin Brown, savings specialist at Scottish Friendly, comments:
“Today’s inflation data underline that we’re now in the worst cost-of-living crisis since 1977 – the last time that real interest rates were so low. This is destructive not just for people’s living costs now, but highly detrimental to their ability to save for the long term too.
“During past recent periods of high inflation, such as the mid noughties, the bank rate was also considerably higher, cushioning the net effect of price rises. But this time is different, or at least different for a whole generation. The only real comparison is to go as far back as 1977 – the year of the Winter of Discontent. This is why this feels so very hard.
“In practical terms households are being hit in two painful ways. Their ability to keep up with day-to-day spending is diminishing at pace as inflation accelerates. And their ability to save in a meaningful way is severely reduced – both in nominal and relative terms.
“This inflation crisis really is the worst we’ve seen in a lifetime. Those aged 18 in 1977 would be 63 today. Realistically, the vast majority of the UK’s population has never had to go through what we’re experiencing now. One can only hope that households are taking practical measures to cut costs, increase rainy day savings and prepare for worse to come.”
