After latest UK inflation figures show that inflation dropped by more than expected in June, investment managers discuss what this means for investors, the economy and potential inflation rate rises.

Figures from the Office for National Statistics show that annual UK inflation fell to 7.9 per cent in June, exceeding City forecasts for a decline to 8.2 per cent, while core inflation has decreased to 6.9 per cent.

The fall has largely been attributed to the drop in petrol and diesel prices and to some extent the lesser pace of food price inflation, easing forecasts for how much the Bank of England will need to increase interest rates over the coming year. Inflation is nevertheless above the Bank's official 2 per cent target and also much higher than the G7 group of advanced economies.

“The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year,” UK chancellor of the exchequer, Jeremy Hunt, said. 

Here are some reactions from investment managers to the decline.

Daniele Antonucci, CIO, Quintet Private Bank (parent of Brown Shipley)
“The latest UK inflation report shows that inflationary pressures remain strong. The good news is that headline and core inflation, which excludes volatile components such as energy and food, are both easing and, this time around, more than expected. The bad news is that this is happening from still elevated levels of inflation and, by and large, appears to be mostly because of energy disinflation and, to some degree, a lesser pace of food price inflation. What’s more, wage growth, which is a key driver of the all-important services inflation given that it has a large weight in the inflation basket, continues to be robust and the labour market remains quite tight.

“Taken together, these figures suggest that the fall in core inflation from its 31-year high, while welcome, is unlikely to discourage the Bank of England from hiking rates at least a while longer. Even though how far the rate increases will go remains unclear, we expect further weakness ahead as the impact of tighter financial conditions, the inflation squeeze and fiscal austerity all bite.”

Ben Jones, director of macro research, Invesco
“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 50 bps 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."

Nicholas Hyett, investment manager, Wealth Club
"June inflation numbers have 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 triggering a painful recession. The Bank of England may ease off the pedal where interest rate rises are concerned, but its careful balancing act isn’t over yet.”

Michael Metcalfe, head of macro strategy, State Street Global Markets
“June’s inflation data will make welcome reading for gilts and the BoE alike. But after upside surprises totalling a not so cool 1.5 per cent in the past four-months, it will take more than just one month’s data to calm rate markets. The good news here is that online data from PriceStats, a web scrape of thousands of UK prices across a range of sectors, shows inflation continuing to fall month-on-month in the first half of July, after showing a similar contraction in June.” 

Chris Daniels, chief commercial officer of SmartSave, a Chetwood Financial firm 
“Today’s data confirms what we already knew – although inflation dropped more than expected, it is not falling fast enough, and the Bank of England may have to raise interest rates again. For savers, the question is whether they would see the direct benefits of the next interest rate increase, or whether they will continue to see their savings losing value in real terms.

“There is a huge gulf between the base rate and the rates available on many savings products. The larger banks, for example, are offering relatively low rates of between 0.9 per cent and 1.75 per cent on easy-access savings accounts. Fixed-rate products, particularly those not on the high street, are offering far higher returns. Those in a position to lock their savings away are likely to benefit from stronger returns and a better chance at protecting their money from the effects of inflation. Market conditions are turning in savers’ favour, but people would still be wise to hunt out the best deals based on the amount they can set aside and how long for. While challenger banks currently topping Best Buy tables may be lesser known, they are covered by the same Financial Services Compensation Scheme (FSCS) protection as the bigger banks, meaning that savers can securely open a new account within minutes online to secure competitive rates.”

Giles Coghlan, chief market analyst, consulting for HYCM       
“Bank of England policymakers will be setting the scene for yet another rate hike on 3 August after today’s inflation reading. Today’s modest decline to 7.9 per cent may signal to investors that economic pressures are gradually easing. However, core inflation continues to be a thorn in the central bank’s side at 6.9 per cent, highlighting the risk that domestic inflationary pressures are here to stay for now. The implications of this inflation reading go beyond just numbers on a chart. As stagflation fears loom larger, the GBP may face downwards pressure from that quarter too. The persistence and increasing severity of UK inflation could amplify worries about the country’s economic health on the world’s stage, potentially leading to a decline in the GBP’s value.”