Wealth managers and economists speculate about whether the latest consumer price inflation figures will force the Bank of England to pull the trigger and hike rates as soon as December.
Yesterday, latest official figures showed that UK inflation rose by 4.2 per cent in October, more than double the official Bank of England target of 2.0 per cent. While some of the rise may be driven by temporary factors, a debate now raging across financial services is whether more long-lasting causes, such as the sheer volume of central bank money printing of recent years, will endure.
Wealth managers’ asset allocation decisions of the past decade have been shaped by a world of ultra-low, or even negative, official interest rates. They have been forced to go up the risk curve to find yield – not always ideal for investors – and the situation in part explains the boom in private market, alternative investments.
What happens as and when central banks decide enough is enough and hike rates? Here is a selection of views from UK wealth managers and economists about the UK data.
Charles Hepworth, investment director, GAM
If yesterday’s employment numbers weren’t evidence enough for the Bank of England to act, then today’s inflation print, as measured by the CPI figure for October, surely is. Coming in at 4.2 per cent, this is the highest inflation has been over the last 10 years and is ahead of what the market was anticipating. Energy price rises and continuing supply issues are playing their part in forcing overall consumer inflation higher. While it may be debatable whether a rate hike will have the desired impact, doing nothing clearly won’t.
The sharp increase in the headline figure can be partly attributed to the energy sector. In October, Ofgem hiked the energy price cap by 12 per cent, following a 9 per cent increase in April. These hikes have resulted in the annual inflation rates for gas and electricity of 28.1 per cent and 18.8 per cent, respectively, the highest price growth since early 2009. Combined with rising food prices – energy and seasonal food prices jumped by 0.6 per cent on the month – there is a real concern that the higher prices of staple items, such as food, could result in a material hit to living standards among lower income groups.
Although significant drivers, the current inflationary spike is not solely limited to energy and food prices, as illustrated by the jump in the core measure which excludes such movements. Indeed, price pressures are being reported across the board, with the majority of the main categories making an upward contribution to inflation. The most substantial included transport costs, as used car prices increased by 4.6 per cent on the month, and within the restaurants and hotels category, as prices increased by 1.1 per cent on the month.
With CPI inflation moving further away from the Bank of England’s 2 per cent target, there is now even more pressure on the MPC to act to rein in price growth at its upcoming December meeting.
The path of tightening beyond this will be dependent on a combination of labour market conditions and how “transitory” inflation in the UK proves to be. As price pressures are yet to show any signs of abating, nerves by policymakers are becoming ever more present.
Matteo Cominetta, economist at Barings Investment
A sizeable downside surprise was probably needed to make the Bank of England Monetary Policy Committee (MPC) defer the start of a hiking cycle much further. With the opposite happening, in a context of solid wage growth and faster recovering employment suggesting that the transition from furlough back to employment is proceeding smoothly, the way is paved for a rate lift-off to start soon. Until yesterday markets were pricing a hike in January as being more likely than in December. This will probably change: hawkish comments from Governor Bailey also point in this direction. The next labour market release will be crucial to make MPC members’ mind up between hiking immediately or waiting until January.
Shane O'Neill, head of interest rate trading for Validus
This higher-than-expected print will give the Bank of England incentive to increase rates at their next meeting in December. They disappointed markets in November by holding off on a rate hike despite it being fully priced in – citing slowing demand and growth concerns. Critics at the time suggested that the Bank was not acting to curb runaway inflation and this print will go some way towards validating these critics.
After yesterday’s strong employment data, the missing piece of
the puzzle according to Governor Bailey, there is seemingly
little reason to expect the Bank not to hike, though this
thinking has scuppered traders before. If the first post-furlough
employment data point, released shortly before the Bank’s
December meeting, confirms the strength of the employment market
and inflation, as seen today, continues higher – it is going to
look more and more as though the Bank missed an opportunity in
Tim Snaith, partner at Winckworth Sherwood
Inflation remains well above the 2 per cent target and is set to rise possibly as high as 5 per cent in the spring next year, fuelling MPC worries of the upside risks in the medium to long term. Any sustained increases will mean more day-to-day financial pain to consumers with both raw material and labour cost rises, but also more potential longer-term damage to investment portfolios and years of effective wealth management.
As legal practitioners, we have been regularly fielding enquiries from clients over the medium to long-term impact that higher inflation could have on their estate planning. With more clarity over the coming months on the levels of inflation that we might see in 2022, coupled with a possible hike in interest rates, we would urge clients to review their personal affairs regularly with their advisors to ensure that they have a holistic plan in place to address the financial, legal and tax issues that can arise from changes of this nature.