The UK Consumer Price Index (CPI) touched a fresh 40-year high of 9.1% in May, remaining out of double-digit territory, but experts warn the inflationary peak is yet to come.
Some economists had expected worse figures for May, but AJ Bell head of personal finance Laura Suter (pictured) said more bad inflation news is still on its way.
“The UK public have been spared double-digit inflation for now, but it’s just around the corner. RPI inflation, which is what many of us see our bills increase by every year, has now hit 11.7% – another 40-year high,” said Suter.
“Unfortunately, more gloom lies ahead, and the hopes of inflation ebbing away later this year are dead.”
The continued rise in inflation has not surprised many in the industry. Charles Stanley chief investment analyst Rob Morgan is instead looking more closely at how this is impacting markets.
“It’s clear inflation is no longer ‘transitory’, but the unanswerable question is how embedded inflation has become,” said Morgan who points out inflation is impacting both fixed income and equity markets.
For bond investors, the income stream appears less attractive in today’s market and for equity investors, future profits are worth less in today’s terms if inflation is higher. There are also obvious pressures to companies in terms of how they reinvest and pay staff, the chief investment analyst explained.
“This makes the investing environment difficult,” he added. “While better times will return, investors need to be prepared for choppy markets in the short term. It’s vital to ensure you have a diversified portfolio and hold your nerve.”
Delving into the data
Surging fuel costs have again been identified as the root cause for inflation increases. Petrol and diesel prices have continued to rise and – according to the RAC – hit new records on 19 June of 188.70p and 196.06p respectively.
Household bills have also been impacted – with the 12-month inflation rate for electricity and gas reaching 53.5% and 95.5% respectively.
In contrast to rising fuel and energy costs, there is evidence core inflation may be beginning to fall away.
Looking amid the data, Handelsbanken UK economist Daniel Mahoney pointed out core inflation had fallen 0.3% to 5.9% in May on a year-on-year basis.
“As the year progresses, we expect core inflation to continue falling away but to be more than offset by rising energy and food prices,” said Mahoney.
“Latest Bank of England analysis shows that CPI inflation is now expected to hover at around 9% for the next few months before spiking to around 11% in October when Ofgem’s energy price cap for residential consumers is lifted once again.
“May’s figures would suggest that we are, indeed, on course for this trajectory.”
BoE too ambiguous on interest rate outlook
Reacting to today’s news, Royal London Asset Management senior economist Melanie Baker expects more rate rises to follow, though she warns more may need to be done by the Monetary Policy Committee.
“By acting and sounding serious about tackling high inflation, they can help lower inflation expectations,” said Baker.
“However, the Bank still isn’t sending as strong a message as they could with the last set of minutes sending an ambiguous message on their interest rate outlook.”
Quilter Investors portfolio manager Paul Craig agrees and argues extraordinary economic times call for a stronger reaction from the UK’s central bank.
“[The Bank of England’s] current strategy is doing little to stop inflation running away from it and thus harder decisions are coming very soon with the Bank already hinting at a larger rise at its next meeting,” said Craig, who now points out the labour market as a crucial metric for both the Bank of England and the government.
“The government and Bank of England will be watching the labour market closely, and not just for signs of more strikes over inflationary lagging pay rises. With inflation where it is at, any sign of employment weakness creeping in will be a big warning sign for the economy.”