Inflation has delivered an unwelcome Christmas surprise for households, investors and the Bank of England as figures released today defy the consensus the UK consumer price index had peaked at 3 per cent.
Bank of England governor Mark Carney will have to write to Chancellor Philip Hammond as the inflation figure hits 3.1 per cent with sterling and oil continuing to push up prices.
Aegon head of pensions Kate Smith says the figures are “as welcome as a burst water pipe” and says people will stop saving saving in response to squeezed incomes. “The news that we’ve not yet turned a corner means that people’s incomes are effectively shrinking,” Smith says.
Investors could be caught off guard if inflation continues, while the Bank of England will also be disappointed having forecast inflation to peak in October, says AJ Bell investment director Russ Mould
Sterling spiked back toward the $1.34 mark and UK 10-year Government bond yields rose a couple of basis points to 1.22 per cent suggesting markets anticipate further interest rate rises.
Mould says even though sterling has strengthened since its post-Brexit vote lows it remains weak by historical standards and continues to push up prices for food, clothing and leisure activities.
He says: “If inflation does persist, or even accelerate, that would be a huge surprise to investors and not necessarily a nice one.”
Mould adds: “Any faster-than-expected removal of central bank liquidity could be a shock to a range of asset classes – stocks, bonds, cryptocurrencies, art, you name it – which have feasted off cheap money and a sustained increase in inflation could be an early signal that the bull market party is moving into its final phases.”
Aberdeen Standard Investments chief economist Lucy O’Carroll says the Bank of England has a “tricky tightrope to walk”.
O’Carroll says: “Too much inflation could threaten the Bank’s credibility and therefore its grip on the economy.”
She adds: “But they need to keep consumer spending, the engine of the UK economy, chugging along too. If inflation keeps creeping up, or remains elevated, then the chances of the engine sputtering rise incrementally.”
Sanlam UK head of portfolio management Charlie Parker says each client experiences individual rates of inflation and the price of luxury goods has risen far more in recent years than mainstream products.
He points out that school fees have risen 553 per cent over the last 25 years compared to 201 per cent for consumer prices and 217 per cent for wages.
Parker says a portfolio would typically need to hold 60 per cent in risky assets like shares to beat inflation by 3 per cent and this would rise to 100 per cent for investors seeking to outperform by 5 per cent.
“Any investment that promises to beat inflation without taking risk is not to be trusted,” Parker says.