This morning’s announcement from the Office for National Statistics (ONS) of the November inflation data shows the annual year-on-year CPI rate to November has decreased to 10.7%. Whilst this was below expectations of CPI coming it at around 10.9% and below the October figure of 11.1%, it is still a massive number and shows that prices are still rising at a dramatic rate.
But what does today’s inflation news mean for advisers and clients? The following comments from IFAs and investment experts make it clear that it brings little cause for any serious Christmas cheer:
Daniel Casali, Chief Investment Strategist at UK wealth manager Evelyn Partners, comments: “Though CPI inflation slowed in November from October, the data has yet to show conclusive evidence that it has indeed peaked. For instance, there remains upward inflation pressure in services: the annual rate for restaurants and hotels was 10.2% in November 2022, up from 9.6% in October and the highest rate since December 1991.
“Moreover, core CPI inflation (excluding food, energy, alcohol and tobacco) is elevated and there are concerns that this could lead to the secondary impact of workers demanding higher wages to keep up with the rising cost of living. There is some evidence of this from the labour market statistics released this week: annual regular wage (excluding volatile bonuses) rate accelerated to 6.1% in October for the whole economy on a 3-month moving average, up from 3.6% at the end of 2021. With the unemployment rate still near cyclical lows, there is a possibility that higher wage rates become entrenched in the economy, increasing the risk of a wage-inflation upward spiral. This is a risk that the government has cited in their discussions with the trade unions.
“Nevertheless, CPI inflation should decelerate in 2023, as expected by the consensus of economists. First, slowing economic growth, along with higher taxes, rising mortgage rates and less government support on energy prices next year is likely to be a drag on real household take-home pay in 2023. Lower discretionary incomes should prove to be significant headwind against accelerating inflation from here. Second, core output Producer Price (PPI) inflation has deteriorated to 13.2% in October, after peaking in the summer at 14.9%. Over time, the lower cost of inputs into production should exert downward pressure on consumer prices. Third, high base effects from sharp price increases in 2022 will make it difficult to sustain high annual CPI inflation rates in 2023. And fourth, the impact of supply chains disruption on creating inflation in the goods market from the pandemic should begin to fade.
“Given the current high rate of consumer price rises, the Bank of England will continue to raise interest rates for now, and particularly as inflation is a long way from its 2% target.
Jonny Black, strategic director at abrdn said: “This week is a thicket of economic data and developments that clients will be closely studying.
“Inflation’s just the start. Tomorrow, we’ll see whether the Bank of England raises interest rates again or if it will stay its hand.
“Among all the noise, advisers have the critical job of keeping clients focussed on the long-term view.
“As every adviser knows, the road to poor outcomes is often paved with short-term, knee-jerk decisions. This holiday season, maintaining close communication with clients and being ready to answer their questions – on the technical aspects of advice, and their more emotional financial concerns – will be a true gift that keeps on giving.”
Philip Dragoumis of Thera Wealth Management says: “It’s too early to call a peak in UK inflation but at least now it is heading the right way. Price rises in restaurants, cafes and bars provided the highest upward pressure in November and the feeling is that companies are still trying to keep their profit margins intact (and even increasing them) by passing on absolutely all input cost rises. We need to see a few more months of data before we call a peak in the rising interest rate cycle but we get the impression that we are not far off. There are reasons to be cautiously cheerful.”
Samuel Mather- Holgate, IFA at Mather and Murray Financial comments: “Though inflation came down, it will be disappointing for borrowers, as the reduction in UK inflation didn’t match that of the US yesterday. This will mean that the Bank of England will push forward with a further 0.5% increase in rates in its flawed plan to get inflation under control. This proves the central bank got it wrong. Inflation will not peak at over 13%, it’s already starting to fall. Markets will react negatively to this today, and I expect to see further losses all week. All eyes will be on what the US central bank does today. That will have a greater impact on markets. We’ll get a glimpse of how central banks around the world will react to falling inflation.”
According to Douglas Grant, Group CEO of Manx Financial Group PLC:“Slowing inflation is good news and could suggest that we have reached a peak. These are still eye watering numbers though and suggest that the start to 2023 will be difficult for many SMEs. We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract rising interest rates, supply chain issues, increases in wages and a worsening cost-of-living crisis. Our research revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it. What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance. SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. The amount of growth that is being sacrificed is significant and will require new solutions which are designed to address this funding gap.
“Despite positive introductions and extensions to loan schemes in 2022, such as RLS Phase 3, more needs to be done. For some time, we have been calling for a sector focused permanent government-backed loan scheme which brings together both traditional and alternative lenders to guarantee the future of our SMEs. As the government looks for ways to power the economy’s resurgence in 2023, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies and, in turn, our economy. We very much hope this is something that becomes a reality.”
Giorgio Vintani, equity strategist at Inflection Point has put a more positive spin on today’s news commenting: “It looks as the Bank of England’s effort to control inflation are finally yielding some results. While we might have seen the peak in inflation this is far from being at normal levels, so the Bank of England will continue to raise rates. Good news. For savers as interest rates are headed higher; borrowers can also hope their mortgage rates won’t raise as much.”
Taking the view that inflation has peaked, but there is still a long and painful road ahead Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services comments: “After what feels like an eternity of worrisome fiscal news, there is some Christmas cheer to be found in today’s figures which show that UK inflation may have finally peaked. However, at 10.7%, this is still well above the Bank of England’s 2% inflation target, so this is just the end of the beginning for the Monetary Policy Committee.
“In October the price cap increase drove a 42.7% uptick in utility prices, but the now-fixed price cap has thrown water on the flames of burning energy price inflation. Food inflation is also moderating, while sterling’s rebound on the foreign exchanges should ensure that other imported inflationary pressures diminish too.
“The UK still faces strongly embedded domestic drivers of inflation however, meaning the glass is still half empty in the medium term. Many businesses are meeting pay demands and raising prices to pay for it. Yesterday’s labour market figures showed private sector pay growth sitting at 6.9% for August to October, an increase of 0.3% and higher than the Bank of England would hope.
“The Bank will likely respond as per its mandate to manage inflation by further raising its base rate and keeping it elevated for most of 2023. There is still a long and painful road to financial recovery ahead, winding through a stagnating economy and a lengthened recession. But this is a necessary path if the UK wishes to get out of the woods and deal with its stubborn inflation.”
Wes Wilks, CEO at IronMarket said: “Bringing a knife to a gunfight, the Bank of England must maintain its aggressive stance for this week’s rate decision at least. The UK economy is so fragile, they will break it, and markets will counter any positive pricing from a lower inflation print with the larger negative effects on the economy of raising rates into a recession. We may be seeing peak rates imminently, which potentially brings UK rate cuts forward to as early as the second half of 2023. Savers, lock in your rates, and borrowers, sit tight.”