Inflation has risen faster than expected hitting 1.6 per cent in December, meaning a likely correction for gilts, while global stocks look set to benefit.
A month earlier inflation had been 1.2 per cent and the expectation had been that today’s figure would be 1.4 per cent.
Higher air fares, food and petrol prices all contributed to the increase in the annual inflation rate in December, which represents a 30-month high.
Director of research at WisdomTree Viktor Nossek says the UK now finds itself in a “tight spot”.
“Unfortunately the UK is facing ‘bad inflation’ caused by a tumbling pound and rising costs on the supply side, rather than surging demand,” Nossek says.
“In terms of strategies to play the current environment, gilts look prone to a correction now, with inflationary pressure by no means priced in.
Conversely, the largest UK equities (and in particular dividend-payers) with global reach look attractive versus domestically-focused stocks, while UK small caps look vulnerable because of the impact a fluctuating pound is having on companies’ ability to price goods and services effectively.”
Nossek says inflation will push up borrowing costs, potentially ending the UK”s debt-fuelled “spending splurge” and hitting GDP growth that so far has held up following the UK’s vote to leave the European Union.
Last night, Mark Carney told an audience at the London School of Economics that the Bank of England would be keeping a close eye on consumers, which have driven the UK’s resilience following Brexit.
IHS Markit chief economist for the UK and Europe Howard Archer says the odds look stacked in favour of inflation moving above earnings growth during 2017.
“It looks inevitable that consumer purchasing power will deteriorate markedly over the coming months as inflation moves appreciably higher and earnings growth is limited.
“Companies will highly likely look to clamp down on workers’ pay as they strive to save costs in a more difficult environment and as their imported input prices are lifted by the sharply weakened pound.”
A 15.8 per cent leap in producer price input inflation and a 2.7 per cent increase in producer output prices show that further increases may be in the pipeline, AJ Bell investment director Russ Mould says.