Yesterday's official figures underscored the UK's hot inflation problem. Trying to ease some of the pain over rising living costs, such as energy, the Chancellor of the Exchequer, Rishi Sunak, cut some taxes and potentially left room for more reductions later on.

It was a big day on the macroeconomic and fiscal policy front in the UK yesterday. Finance minister Rishi Sunak sought to alleviate cost-of-living pain by reducing fuel duties, reducing thresholds for payroll tax (aka National Insurance Contributions) and taking other steps. On the same day, official figures showed that consumer price inflation for February rose by 6.2 per cent from a year before, the highest level since 1991. 

Already, the Bank of England has raised rates; economists expect more hikes from the BoE and, indeed, the US Federal Reserve and certain other central banks. Higher rates and strong inflation challenge wealth managers’ asset allocation assumptions. How to guard wealth against the not-so-hidden “tax” of falling purchasing power? Already, “safe-haven” assets such as gold appear to be making a comeback.

Here are some wealth managers’ commentaries:

Silvia Dall'Angelo, senior economist, Federated Hermes International
Delivering today’s Spring Statement was never going to be easy for the Chancellor [Rishi Sunak]. The cost-of-living crisis has been front and centre since inflation started to climb sharply last year, there is still significant uncertainty surrounding the recovery from the pandemic, and the war in Ukraine has pushed international energy and food prices even higher, making the prospect of stagflation more real.

The Chancellor had little to offer in the way of relief to households facing the most severe cost-of-living crisis in decades, as he moved within the boundaries of the limited fiscal space he has been left with following the Covid crisis. The Chancellor announced some targeted and limited measures to help households cope with higher energy bills, namely a cut to the fuel duty until March 2023 (worth about £5 billion), a doubling of the household-support fund to £1 billion and a VAT removal on solar panels, heat pumps and insulation for homes. However, even taking into account the previously-announced £9 billion package, the government’s support for households is a drop in the ocean compared with the increasing pressures from climbing energy and food prices. Over the course of the year, households’ energy bills alone are likely to increase by about £50 billion as a result of higher oil prices in recent months and utility bill increases in April and October.

For now, the Chancellor has adopted a measured approach to fiscal support in response to the current and worsening cost-of-living crisis. Despite the recent easing, the overall fiscal stance remains restrictive, and the Chancellor is still trying to stage a return to fiscal discipline following pandemic-related largesse. Limited fiscal space has probably compounded with political calculations, as the Chancellor would probably like to save some fiscal ammunition to deploy closer to the next general election in 2024. 

Andy Butcher, branch principal and chartered financial planner, Raymond James      
The increase of the National Insurance threshold is a much-needed move to help household finances, but the absence of an increase in the secondary threshold, where employers start paying National Insurance, will hit small businesses hard as they grapple with spiralling inflation. The employer's allowance will save small businesses £1,000, but the 1.25 per cent increase in employers’ NICs will, in all likelihood, more than offset this for most small firms. These businesses are drivers for growth, accounting for 61 per cent of employment and around half of turnover in the private sector, and so these measures could have a damaging impact on economic recovery. This is still a tax rise, and one that is ill-timed and unwelcome for businesses.

Marc Reale, wealth manager, Wilton
The Chancellor’s measures that seek to tackle the cost-of-living crisis and adjust to growth and inflation forecasts, unfortunately won’t take the sting out of market instability for the foreseeable future. It is likely that we will continue to see conditions change more than usual and more than we would like, month to month for the rest of the year. Given that the government has presented a flawed and insufficient plan to curb the impact of the pressing financial problems at hand, it is critical, now more than ever, that we thoroughly evaluate savings and investments to make sure that they are as secure as possible. 

Rebecca Williams, head of wealth planning, Brown Shipley
How are these tax cuts going to be paid for? Don’t forget about Capital Gains Tax and the Pensions Tax Relief which are still areas in the Chancellor’s toolbox. The can has been kicked down the road but they might still be on the agenda. We wouldn’t be surprised to see them mentioned in the Autumn Budget.

A massive curveball was the basic rate of income tax being cut by the end of the current Parliament in 2024, though this won’t help anyone right now. The Chancellor has said that this development has been budgeted, though we do wonder how these will be paid for. There may also be unexpected developments on the global stage, which impact fiscal planning. 

Don’t forget, behind the tax cuts, there are significant increases from 6 April with regard to the Social Care Levy and dividend tax rises.

Vivek Paul, UK chief investment strategist, BlackRock Investment Institute
From the Treasury to the Bank of England, policymakers are in a bind in a world shaped by supply-shocks. Yesterday’s Spring Statement follows last week’s Bank of England rate hike, and is set against the backdrop of a cost of living crisis in the UK. The war in Ukraine is primarily a human tragedy, but it also levies a heavy economic cost: a new supply shock has been layered onto the existing one caused by Covid-19, reducing global growth and exacerbating inflation.

The UK Chancellor’s statement aims to balance the need to be seen to tackle the UK’s cost-of-living crisis with the desire to re-establish economic credibility with the electorate. It also seeks to preserve optionality to deliver crowd-pleasing tax cuts, which were explicitly flagged, ahead of a general election within two years. But the room to manoeuvre on policy is narrower than ever for the Bank and the Treasury – a consequence of the coordinated fiscal and monetary easing in 2020 that amounted to a policy revolution. 

The Bank is in a bind because, while it acknowledges that supply-driven inflation is still likely to rise further, it knows that overly aggressive tightening could come at too high a cost to growth and employment. The Treasury, meanwhile, is constrained by debt-to-GDP at multiples of levels similar to the early 1990s, with surging inflation pushing up borrowing costs.

We maintain our neutral stance on UK equities – we see the market as fairly valued, rather than cheap, and prefer risk assets in other developed markets, particularly the USA. In fixed income, UK gilts are a neutral exposure amid a broader DM government bond underweight – we think UK yields will not rise as fast as US equivalents, in part because market expectations for UK tightening seem excessive.

Sarah Giarrusso, investment strategist, Tilney Smith & Williamson 
The annual headline inflation continues to reach new 30-year highs, driven by a number of items. Food and non-alcoholic beverages rose by 5.1 per cent over the year and the surge in clothing and footwear continued this month, increasing 8.9 per cent from a year ago. Services also saw another leg up with recreation and culture increasing 4.7 per cent year-over-year and restaurants and hotels' prices increasing 5 per cent.

Although war in Ukraine has increased risks to both inflation and growth, we should not lose sight of fundamentals which remain strong. Earnings' growth in equity markets has resumed an upward trajectory and low levels of unemployment prevail in developed economies around the world.