We’ve got positive news to start your day today. And that is that the ONS has this morning reported the latest UK inflation data showing that UK CPI has fallen more sharply than expected to 3.4% in the year to the end of February – down from 4% last month. This means UK inflation is at its lowest level for over 2 years.
With the Bank of England’s MPC poised to make their next rate decision tomorrow, the data make for interesting reading and will have consequences for the next move in interest rates – whenever that might be.
But what do market watchers and investment strategists make of this latest positive inflation data and when we might start to see those cuts to interest rates we’re all so keen to welcome?
Lindsay James, investment strategist at Quilter Investors said:
“UK inflation has fallen to the lowest level seen since September 2021, with the annual rate coming in at 3.4% in February having been stuck at 4% for the prior two months. Meanwhile, core inflation also dropped to 4.5% down from 5.1% in January.
“With the majority of divisions seeing reduced levels of annual inflation in February, with areas such as food and communication seeing notable falls, the data paints a picture of broad disinflation across the goods economy, with the services sector seeing a much more muted drop. The plunge in energy bills anticipated in April could see an even greater fall in headline figures, aligning with the Office for Budget Responsibility’s expectation that inflation will average out at 2.2% in 2024. However, economist forecasts for the medium term have considerable variance, highlighting risks that are still present around energy security, supply chain resilience and structural labour shortages.
“Wage growth has been a significant driver of inflation in the service economy for some months, and recent data showed this is now slowing a little. However, it will likely make the Bank’s 2% target more difficult to achieve. This looks likely to remain a strong inflationary driver while there is an ongoing mismatch in the labour supply available and the level of demand on offer, with recent business surveys flagging that this pressure remains elevated and a cost they are passing through to customers in the form of price rises. Similarly, ongoing disruption to international shipping continues to put pressure on supply chains amidst higher freight rates and longer lead times.
“With signs that the UK has already returned to a modest level of growth despite interest rates remaining high, this inflation reading will give confidence to the Bank of England that inflation is now coming to heel. As it looks likely to fall further in coming months, with the 12% cut to the energy price cap kicking in from April, the Bank’s monetary policy committee will be under further pressure to consider rates cuts sooner rather than later.”
Nick Henshaw, Head of Intermediary Distribution at Wesleyan, said: “Inflation’s downward trajectory continued today and we can confidently imagine that it will continue. The Bank of England anticipates that inflation could fall to just about its two per cent target by the end of the year.
“All eyes will be on what this means for tomorrow’s interest rate decision, and it’s likely that the Monetary Policy Committee will remain cautious about cutting interest rates just yet.
“Still it’s still quite likely that rates will start to fall in the coming months, albeit slowly.
“Against this backdrop, clients who have been making healthy returns holding cash may need to consider adapting their strategy and considering exposure to more diverse asset classes, including equities.
“Whether holding money in cash or in the market, it will be important that savers make the most of this year’s ISA allowances in the weeks they have left of this tax year.
“They should also be considering how they can use ISAs to maximum advantage when the allowance refreshes on April 6, particularly given the raft of new changes incoming from April. Our recent research found that although 78% of UK adults didn’t know that they will soon be able to open multiple ISAs of the same type, when told, a third (31%) said it would make them want to invest more money into ISAs.”
Danni Hewson, head of financial analysis at AJ Bell, said:
“There is no doubt inflation is moving in the right direction. Just think back to this time last year when CPI was in double digits and food inflation hit a tortuous 18% as peppers, cucumbers and salad leaves vanished from supermarket shelves.
“A much more manageable 3.4%, cooler than had been expected, has already impacted market expectation of how many rate cuts the Bank of England might be able to push through by the end of the year. Money markets are once again pricing in four or even the off chance of five cuts by the end of the year, where yesterday just three seemed possible.
“Today’s figures are unlikely to provide much more than a talking point for MPC members at their meeting tomorrow. The anticipated impact of a falling energy price cap will have already stoked expectation that the Bank’s 2% target is within reaching distance. Until that point a twist of the hand isn’t expected.
“For households, bruised and bloody after two years of rising prices, today’s number won’t provide a great deal of comfort. For mortgage holders who have already dropped off ultra-low fixed rates, adjustments will have been made and some would have been deeply uncomfortable.
“The latest Which? survey shows many mortgage holders have been robbing Peter to pay Paul, missing payments on credit cards or energy bills, just to make sure the roof over their head is paid up to date.
“Because whilst the price cap has come down, absent that government cash dropping into bank accounts in £66 or £67 instalments and most households have actually been paying more for their energy over the last few months.
“Add to that the fact that everyone is feeling inflation weary. Savings have been raided, unwanted property has been sold off and people have been trading down wherever they’ve been able to.
“With rental prices still at a premium and more than a million households heading towards that mortgage switching cliff edge this year, the cost-of-living crisis is still very real.
“Things are often darkest before the dawn and with producer input prices still falling there’s no doubt we are on the cusp of a new day. Some prices are coming down and that heart stopping moment at the supermarket till has become easier as competition for market share continues to drive down the cost of many essentials.
“But we have all become brutally realistic about our changing fortunes. For every cut to National Insurance or drop in the energy price cap, another bill seems to appear to gobble up any extra pennies we might have been hoping would end up in our pockets.
“The Which? survey sums the situation up perfectly. A quarter of households think their financial situation will get better over the next year, but a third expect things will only get worse.”
Commenting on the latest CPI data from the ONS, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:
“In a rare piece of good news, inflation as measured by the Consumer Prices Index (CPI) fell to 3.4% in February 2024, from 4% in January. In a better piece of news for the UK consumer, the fall in inflation was driven by a fall in food prices (5% in February as opposed to 7% in January) – this is the 11th consecutive fall in food prices from a high of 19.2% in March 2023. Inflation including housing costs was also lower than the January figures, but the worrying facets of higher energy and rental costs remain.
“Overall, the lower inflation allows the policy makers some breathing space. While this may come as an incentive to markets to price in rate cuts, the Bank of England still insists that this is not the time to relax monetary policy, as inflation still remains a concern, in the face of persistent services price and wage increases. While policy rates are expected to remain higher for a while, the uncertainty around the future trajectory of both inflation and interest rates persists – it will be some time before we will be able to see clearly as the rain clouds still linger.”
Tom Stevenson, Investment Director at Fidelity International, comments:
‘The significant – and slightly bigger than forecast – fall in inflation from 4% to 3.4% in February was expected and welcome. It provides a helpful backdrop to tomorrow’s rate-setting decision by the Bank of England.
‘Inflation is likely to continue dropping through the spring as cheaper gas and electricity from April drives household energy costs lower. The key unanswered question is whether, and by how much, price growth bounces back from target in the second half of the year – the Bank’s central expectation.
‘Cheaper food was the biggest downward contributor to the February inflation rate, while housing costs and fuel provided some upward pressure.
‘The UK has been an outlier, as inflation has fallen back more slowly than our peers. But the latest data shows us falling back in line with the US and Europe. It provides substance to the government’s claim, at the Budget and elsewhere, that the UK economy has turned the corner.
‘Attention now shifts to what the Bank of England will do with this updated information this week. The expectation remains that interest rates will stay on hold until June at least, and will fall back only slowly from the current 5.25%. Inflation may briefly touch the Bank’s target in the next few months but is not expected to settle at 2% until 2026.
‘That means homeowners expecting a significant easing in mortgage rates this year face higher for longer borrowing costs. This will keep a lid on the nascent housing recovery that has seen prices stabilise in the past few months.
‘The UK stock market meanwhile, has lagged its rivals recently, and now looks good value as the economic and political backdrop improves.’
Rachel WInter, Partner at Killik & Co “Today’s fall in inflation will be hailed as good news, further signalling the steadying of prices. The lower inflation reading will likely bring confidence to investors, indicating another step towards economic stability after two years of turbulence. Companies and individuals will be able to plan for the year ahead with greater certainty.
The inflation situation has improved significantly since October 2022 when it hit 11.1%. Furthermore, last week’s GDP data showed that the UK economy emerged from recession and returned to growth in January, expanding 0.2% thanks to an improvement in retail sales. Although it is not expected that the Bank of England will cut rates when it meets tomorrow, the fall in inflation should encourage it to start doing so later this year, which should be good news for stocks, bonds, and property.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) said:
“Following a torrid couple of years for UK households, this morning’s inflation print is yet further evidence that the outlook for consumers is brightening. While the Bank of England will also cheer the decline in the headline figure, it is unlikely to be convinced that the battle against inflation is won. More good news should be on the way with headline inflation likely to drop below the 2% inflation target in the Spring, but crucially, this is largely being driven by a transitory fall in energy prices. The Bank will instead be keeping a watchful eye on the medium-term inflation outlook, particularly the domestically-generated inflation originating from the services sector. With regular wage growth north of 6% and services inflation still running hot, the Bank will need further evidence that domestic price pressures are cooling before it begins cutting rates.”
CPI will ‘start with 1%’ as soon as April according to James Lynch, fixed income investment manager at Aegon Asset Management as he comments:
‘Another large drop in the headline inflation rates in the UK this morning. CPI fell from 4.0% in January to 3.4% in February. According to the ONS data the largest downward contributions came from food, restaurants, and cafes – that is logical given the previous huge prices rises we have seen in the past in these categories could not be maintained. Food inflation peaked in the UK at 19.2% in March 2023 and has now dropped to 5%, and with further indications this fall is expected to continue which will have a knock on effect in different categories of the inflation basket.
‘Looking forward over the next few months we still expect to see CPI inflation in the UK to start with a 1% as soon as the April print. In large part to the fall in food and indeed the OFGEM energy price cap change.
‘We have the MPC meeting of the BoE tomorrow (21st March) where once again rates are expected to remain on hold at 5.25%. Last month two members voted for a hike in interest rates, one for a cut and six for unchanged rates. Given the sluggish economy, looser labour market, and high confidence that inflation will be below target in the coming months, it is a struggle to see why two members believe interest rates still need to move higher. So if there is a change tomorrow this is where I would expect it to come with a change in the voting pattern.’
Adam Oldfield, chief revenue officer at Phoebus Software, said: “It is certainly encouraging that inflation is down this month – as opposed to last month when it remained at the same level. Combine this positive trajectory with the latest uptick in GDP, and we could be forgiven for hoping for a cut in the base rate this week. But let’s not forget that, at 3.4%, inflation is still high.
I expect the Bank of England will want to see continuing signs of inflation figures slackening before they can confidently plan for a significant base rate reduction. In the meantime, we are all walking this financial tightrope together – as long as we don’t encounter any unexpected crosswinds, we should experience a calmer, more predictable year compared to last year.”
