UK inflation figures came out a day before the Bank of England's rate-setting policymakers sit down to discuss whether to raise rates. The latest variant of COVID complicates matters. A worry is that price rises are no longer just a temporary "blip" but might become embedded in the minds of the public. What do wealth managers think?

Inflation data for November in the UK and US has reignited worries that supply-chain mayhem, energy policies/energy shortages, and years of central bank money printing, have built a “perfect storm.”

For more than a decade, wealth managers’ asset allocation was based on the idea that inflation pressures and hence interest rates would be low. As a result, yields on equities and government bonds were squeezed, and a flood into private, less liquid, markets took place. But if inflation does not start to fall soon, and the likes of the Federal Reserve and Bank of England must pull the rate hike trigger, wealth managers may have some tricky decisions to make.

Yesterday, official UK figures showed that consumer price inflation rose by 5.1 per cent from a year ago, beating the 4.5 per cent figure for October. In the US, prices for final goods increased by an eye-watering 9.6 per cent year-on-year in November, up from 8.8 per cent in October. Again, high energy costs have been a big culprit. The situation drives debate on whether Western policymakers’ anti-fossil fuel stance is politically and economically viable. And it also means that people who grew up in the “great moderation” era of the 1990s and into the Noughties must learn what high prices mean. For older readers, the data brings back uncomfortable memories.

The Bank of England's Monetary Policy Committee, which sets interest rates, is due to make its decision today.

Here are a range of comments from economists, analysts and wealth managers.

Julian Jessop, economics fellow at the Institute of Economic Affairs
The best hope is that inflation settles around these levels, then drops sharply from mid-2022. But the [Bank of England] Monetary Policy Committee’s credibility is on the line if they fail to act now to keep inflation expectations in check. The biggest contributor to the surge in inflation in the UK, as elsewhere, is still the jump in global energy prices, which are now levelling out. But the CPI excluding food and energy still rose by 4 per cent, twice the MPC’s target of 2 per cent for the headline rate.

What’s more, the huge amount of monetary stimulus from quantitative easing means that even if energy prices drop back, inflation may simply pop up elsewhere. There are already signs that cost and price pressures are spreading. Since the MPC’s last meeting, inflation has been faster than expected and the labour market has continued to tighten, despite the end of the furlough scheme.

The new uncertainty created by Omicron is not necessarily a good reason to leave interest rates on hold. Omicron seems more likely to add to inflation pressures, by further disrupting supply chains, than to reduce them by dampening demand. At the bare minimum, the MPC should confirm tomorrow that QE will end this year with the completion of the current programme of asset purchases. Even if it does not also nudge rates higher this week, it should signal that any further delay is likely to be very brief.

Dan Boardman-Weston, CIO at BRI Wealth Management
It comes as no surprise that inflation continues to trend higher given the robust demand, limited supply and base effects that we are witnessing. For the next few months, this trend of higher inflation is likely to continue as this time last year the country was locked down and so it makes the year-on-year inflation numbers even higher. The factors driving inflation are broadly similar to prior months with transport costs, including fuel, making up the largest contribution to inflation with clothes and footwear moving higher as well. 

The most interesting part of all of this is whether the Bank of England will raise rates this week on the back of this data. Having inflation running at 5.1 per cent and interest rates at 0.1 per cent doesn’t seem like the most sensible idea and people could make the case that they are failing in achieving their mandate. The decision is finely balanced though as large parts of this inflationary pressure are outside their control and moving rates higher won’t help. When this is coupled with the emergence of Omicron, the decision is on a knife edge. They may decide to hold fire until they have further clarity on the impact that Omicron has on health and wealth.

Investec Economics
With inflation moving further away from the Bank of England’s 2 per cent target, and quickly surpassing the Bank’s forecast made only a month ago, in which it expected inflation to peak at around 5 per cent in April 2022, the MPC has a difficult decision to make at its upcoming monetary policy meeting. There is now the real risk of inflation becoming entrenched – especially considering the signs of second round effects in terms of rising wages, supported by a strong labour market – but this is balanced against the threat to the economic recovery from the new Omicron variant. Our base case, as outlined in our preview, is that the MPC will vote to keep the Bank rate on hold at 0.10 per cent tomorrow, adopting a ‘wait and see’ approach until more conclusive evidence on the new variant is revealed.

However, if Omicron is as disruptive as feared, this could in fact push prices up further. One driver of the current price pressures are supply chain disruptions which are resulting in goods shortages. Although there are early signs of these peaking, if a new wave of infections leads to further labour shortages from self-isolation rules, or stricter social restrictions result in a bump in demand for goods, this could strain supply further, resulting in even higher prices. If so, this would merely add to pressures, with prices almost certain to rise further in the first half of next year, given that the current surge in energy prices is set to be reflected in the Ofgem price cap change in April.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown
Faced with such a high inflation reading, and with forecasts that the only way is up, the Bank of England would ordinarily be expected to call time on the cheap money party and raise interest rates. But with the recovery far from being in full swing and the Omicron variant an unruly guest, set to knock back confidence further for many sectors, policymakers may be hot and bothered but are likely to stay in wait-and-see mode tomorrow. With a possible Plan C on the cards, and closures of hospitality and retail being considered if hospital admissions soar, as well as a severe income squeeze taking hold, consumer sentiment and spending could take a fresh hit. What is certain is that even if ultra-low rates stay put right now, with prices running so hot, there won’t be an extended lock-in with expectations that February is likely to see rates lift.

Prices don’t look so transitory right now and seem set to linger for much longer. The Federal Reserve seems much more inclined to bring the cheap money binge to an end. Focus will shift to the Fed’s decision on monetary policy later and, with fresh indications that inflation is sizzling hot with producer prices reaching a record annual increase of 9.6 per cent in November, there are expectations that last orders will be called on its mass bond buying programme much sooner, and that an interest rate rise could be brought forward next year. The spread of Omicron is proving a headache to nurse in the US as well, along with ongoing supply chain pains, but with growth much more buoyant than in the UK, withdrawing support doesn’t appear to be quite as much of a dilemma. 

Annabelle Williams, personal finance specialist, Nutmeg 
They say that once the genie’s out of the bottle, there’s no putting it back. It seems that this year inflation is the genie, as prices have risen continuously and there’s little sign that they will fall substantially any time soon. 

Last month, the Bank of England said that it expects inflation to reach 5 per cent by the spring of next year – a worrying figure not just because it makes the cost of living more expensive for households, but also because it’s more than double the Bank’s inflation target of 2 per cent. That’s the rate of ‘healthy’ inflation which an economy can easily sustain. With prices rising at a much faster rate there may be knock-on effects to economic growth, wages or employment levels.