The Office of National Statistics (ONS) has today reported the latest UK inflation data for the year to June 2023. It shows a fall in CPI inflation to 7.9% in June, down from 8.7% in the year to May, to the lowest level in over a year. Importantly, core inflation has also fallen by more than was expected, down to 6.9% from 7.1% last month.
But what does all this mean for your clients’ finances and for their investment portfolios? What about the prospect of further rises in interest rates? Does this reduction in the rate of inflation mean that we’ve turned the corner and can see the end in sight for the cost of living crisis? After all, it just means that prices aren’t rising as quickly as they were – but they are still rising – and at a rate well above the Bank of England’s 2% target. There are lots of questions to which we all need answers.
Finance and investment experts have been sharing their reactions to the latest inflation data with IFA Magazine as follows:
Marcus Brookes, chief investment officer at Quilter Investors said:“Today’s inflation figures give us the glimmer of light as it finally surprises by beating expectations and falling more than predicted. However, while it is a nice surprise to beat expectations, it still leave us wondering once again why the UK is such a drastic outlier compared to other developed economies when it comes to inflation. While the rate of the price rises has dropped to 7.9%, this is still far above where the Bank of England wants it to be before it can even consider a pause in the rate hikes we have become accustomed to.
“Frustratingly, while also beating expectations core inflation is remaining persistently stubborn and refusing to budge significantly. It may be that finally the well-known lags in the effect of interest rate rises are beginning to have an effect, but it still remains very sticky so way too early to begin celebrating. Demand has withstood both inflation and the rise in rates, but cracks are appearing, and as more mortgage holders get exposed to the current rates, the economy is likely to be hit as a result.
“This is unfortunately the path that is likely going to have to be taken in order to get inflation back down to target. The Bank of England has raised rates considerably, and shows no sign of slowing down and thus we are probably on a path to recession in 2024. With an election likely to be next year too there is going to be jockeying from both main political parties, as they look to find a way to stimulate growth. However, in a period where inflation is sky high this is going to be difficult to achieve and thus the choppy waters are here to stay for at least the next 18 months.
“Inflation should begin to come back down to more palatable levels soon, but as we have seen these forecasts are unpredictable. For investors, this means seeking shelter in quality companies that can navigate this difficult environment, while also considering UK fixed income investments, such as gilts, as these look at attractive prices right now as we head into a potentially difficult economic period.”
John Choong, markets and equity analyst at InvestingReviews.co.uk: “Miracles do happen. For the first time in months, CPI comes in lower than expectations at 7.9%. Core CPI also comes in a touch lower at 6.9%, which should allow lenders and borrowers alike to breathe a sigh of relief. That said, champagne bottles shouldn’t be popped just yet as the path to 2% remains a treacherous journey, with core CPI still high and sticky. The easing figures should allow gilt yields to find some relief in the coming days, with markets now less likely to price in a 7% terminal rate from the Bank of England. We may now see mortgage rates start to come down as well. Nonetheless, this will be dependent on whether the next few prints continue to show cooling inflation, especially on the core front. With wage pressures also beginning to ease as well, there’s now hope that both the housing market and the UK economy can achieve a ‘soft landing’ without entering a recession.”
Jon Maloney, managing director of Wellingborough-based Century Business Finance: “Finally, some positive news regarding the economy, something that is much needed in the SME world right now. Hopefully, this will give the Bank of England the confidence to halt any further rate increases, which should in turn slowly begin to get things moving again in what has become a very stagnant period for the economy. There’s still a long way to go yet but things are moving in the right direction.”
Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management: “Finally some good news on inflation, or at least better than expectations. Expect the pound to come under pressure today and a rally in UK bonds. 6.9% core inflation is still high but at least it’s heading in the right direction. The Bank of England should pause but won’t. Another three months like this and mortgage rates will look very different.”
Wes Wilkes, CEO at the Newcastle-under-Lyme-based wealth manager, Net-Worth Ntwrk: “The move down in both headline and core CPI today, and also coming in under expectations, will be welcomed by markets and provide some relief to borrowers, investors and no doubt the Bank of England, too. Prices are still rising by nearly four times the Bank’s target so we are certainly not out of the woods by a long stretch but this could mean the start of the end of the vicious rate cycle as the Bank will want to avoid rising rates into a deflationary environment if the trend in inflation shifts aggressively downwards from here. Over to you Mr Bailey.”
Mark Grant of the UK-wide business finance broker, The Business Finance Branch: “Not only did headline UK inflation fall to 7.9%, lower than forecast, but crucially core inflation, stripping out volatile food and energy costs, also fell to 6.9% in June. Will this be enough for the Bank of England to hold interest rates at the August 3rd rate-setting meeting? The jury will be out for that. Ultimately, this data merely confirms prices are rising at a slower pace, but still rising at a high level year on year for businesses and consumers. This better than expected data is welcome but may not be good enough to prevent further interest rate rises and the increased cost of borrowing we have may already have set the economy on a course to recession in the near term. Many businesses I suspect will still not be feeling like the worst is over this morning.”
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “The amount of this fall may just be the right amount to make the Bank of England change course. It’s more than expected, and should continue on this trajectory. With most mortgage holders not experiencing interest rate rises yet, because they are on fixed rates, it’s time for the Bank of England to reverse its strategy and start cutting rates. This is unlikely to happen until the end of the year but needs to be soon to stave off a severe recession.”
Saxo UK CEO, Charlie White-Thomson says: “Today’s year-on-year UK inflation print of 7.9% is a step in the right direction and evidence that the significant financial medicine in the form of interest rate hikes is taking effect. The big number of 7.9% is still well off the ‘no ifs or buts’ 2% target and the cost of living crisis remains painfully evident. With this in mind, we should prepare for a 25bp hike by the Bank of England on August 03. The war to defeat inflation is not over and the Governor has nailed his colours to the 2% target. Motor fuel prices led the largest downward contribution to the monthly change in CPI while yearly food remains stubbornly high at 17.4% according to the Office for National Statistics.”
Simeon Willis, XPS Pensions Group Chief Investment Officer, commented: “Today’s encouraging figures show that we are finally making ground in the fight against inflation. Whilst the 12-month number is still too high, what’s encouraging is that the price increases over June in isolation have slowed considerably. If this trend continues, we could see the 12-month figure come down to target by Spring next year.
Whilst 12-month inflation at current levels remains damaging for any pensioners with non-inflation linked benefits, this announcement represents welcome news and means than the impact on the real value of a retiree’s pension is less than it might otherwise have been.”
Nicholas Hyett, Investment Manager, Wealth Club: “June inflation numbers has come in comfortably below expectations. While that was driven to a large extent by changes in non-core factors like motor fuel and food prices, core inflation is down too and no sectors have reported dramatic upticks in price.
“While one swallow doesn’t make a summer, there will be real hopes that this marks a turning point for UK inflation. It’s been stubbornly high even as other economics have started to see price rises ease, and that’s created a cruel cost of living crunch.
“With other indicators, such as corporate insolvencies, also suggesting the economy is weakening the next challenge is to keep the economy from collapsing into the deep freeze and trigging a painful recession. The Bank of England may ease off the peddle where interest rate rises are concerned, but it’s careful balancing act isn’t over yet.”
Nathaniel Casey, Investment Strategist at wealth management firm Evelyn Partners, says: “Headline inflation surprised to the downside for a change. Falling prices for motor fuel led to the largest downward contribution to the monthly change in the CPI annual rate. While prices for food and non-alcoholic beverages also made a notable contribution to the downward effects, rising by 0.4% in June 2023 less than the 1.2% rise in June.
“Even more reassuring is that core inflation – a better gauge of underlying inflation pressures – has come off its recent peak and fallen back below 7%. We expect UK CPI to continue to fall at a faster pace in the second half of 2023. One reason is the effect of lower energy prices will continue to feed through. Moreover, services inflation lags producer services output price inflation, which has been decelerating since the end of last year. Food inflation should also continue to ease.
“A key risk to this is wage growth, which continued to increase in May. Whole economy total pay once again accelerated for the three months to May to 6.9%. Regular private sector wage growth also increased slightly for the three months to May to 7.7%, its highest rate since the series began in 2001 (excluding the post pandemic recovery). At these levels, wage growth remains too high to be consistent with the BoE’s 2% inflation target over the medium term. The risk is that persistent elevated wage growth pushes the UK into a wage-price spiral causing inflation to become entrenched.
“As evidenced by the mortgage market, the full effects of previous policy action have yet to be felt by the real economy. Despite the average interest rate on a newly drawn five-year fixed term mortgage increasing to 6.3%, the volume of existing fixed-term mortgages means the average effective mortgage rate for households in the UK has only increased to 2.8%. When these existing fixed-rate mortgages end and households move into new higher rate products the effective mortgage rate will continue to increase. As mortgage payments rise, this will weigh on disposable incomes, which is likely to be a drag on consumption growth.”
Andrew Gething, managing director of MorganAsh said: “Following successive shocks, it’s positive to see inflation ease beyond expectations to its lowest level in more than a year. The hope is this news may allow mortgage lenders to reduce rates and budge even slightly on their fixed-rate pricing. This will be most welcome among those households set to remortgage in the near future.
“But beyond the lower headline inflation achieving the Bank of England’s forecast of 7.9%, we cannot escape the fact that it still remains well above its overall target of 2%. UK grocery inflation did ease for a third consecutive month in June – a trend which has continued into July, but along with sticky core inflation, still remains painfully high. As is such, the good news may still not be good enough and may influence the Bank of England ahead of the next MPC meeting in August.
“The aim of increasing bank rates is to curb spending. For mortgages holders, this will be most painful for around one million on variable rates and less of an issue for those still on fixed rates. Meanwhile, the triple lock means pensioners are receiving increases in the 10% range. You have to ask is increasing pain on one million going to translate into bringing down spending on the rest of the country. Sustained inflationary pressures are a result of an increase in the base costs of food and commodities due to the Ukraine war. This is not driven by increased consumer spending so trying to drive down consumer spending may not be an effective means to reduce inflation.
“Nonetheless, high inflation keeps the pressure on the most vulnerable of households. With scope for further interest rate rises and stubborn prices, this segment of society has the potential to keep increasing in size. With Consumer Duty coming into force in less than two weeks, firms across financial services have a greater responsibility to support vulnerable consumers. Without a consistent approach to monitoring vulnerability, it will be much harder for firms to be alive to the challenges and to meet the FCA’s new rules.”
Kirsty Watson, chief operating officer at abrdn, Adviser, said: “These results show that inflation is slowly making its way back down the scale.
“But with inflation still set to remain higher, for some time longer, a big question that clients will be asking is whether they should be taking greater advantage of slowly rising cash rates, if they’re not already.
“While the ‘right’ answer will naturally depend on individual circumstances, it’s important that clients keep in mind the benefits of keeping a long-term view through their investments. In such a dynamic environment, the value of advice will be in helping clients quickly make changes to capitalise on changes in the economic and investor landscape – but crucially to do so without putting their long-term financial goals at risk.”
Ben Jones, Director of Macro Research at Invesco, comments:
“Headline UK inflation figures were certainly better than the consensus expected but the UK still has a worse inflation problem than the US or Europe. Core inflation remains sticky, only falling slightly to 6.9% and except for petrol prices the inflationary pressures remain present across all sectors.
I expect UK inflation will continue to fall over the coming months but in a fashion that is unsteady, and risks of upward surprises may arise from higher oil and energy prices. While petrol prices are lower over the last year for example, they rose last month, and base effects will be less supportive as we move through H2.
In terms of policy response, the BoE is not done with their hiking process, but the likelihood of a 50bps hike at the next meeting is reduced. Some pressure has been taken off gilts today but a steady fall in yields is too much to ask for just yet. For me to change my view and be more positive on gilts and see a shift in the BoE stance, is if labour market data turns significantly lower. There are some cracks forming with the unemployment rate moving higher, but they are not quite enough yet to cause the BoE to shift tack.”
