Comment as UK inflation rises to 40 year high

Rob Clarry

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Rob Clarry, Investment Strategist at Evelyn Partners, the leading integrated wealth management and professional services group created from the merger of Tilney and Smith & Williamson, comments on the latest UK CPI inflation data:

UK headline CPI inflation surprised on the upside and rose 10.1% year-on-year (consensus: 9.8%), compared to 9.4% in June. The CPI monthly increase was +0.6% (consensus: +0.4%), compared to +0.8% in June.

The less volatile core CPI inflation measure, which excludes energy, alcohol and tobacco, rose by 6.2% from a year ago (consensus: 5.9%), compared to 5.8% in June. 

In July UK CPI hit its highest level in 40 years. Unfortunately, it looks set to continue its march higher in the coming months.

July’s increase was mainly driven by rising food costs. With changes to Ofgem’s price cap in October set to take the inflation rate to around 13%, these are challenging times for UK households. These factors are largely outside of the Bank of England’s control, which means that monetary policy is less effective in tackling them directly.

One area that the Bank does have more influence over is demand for labour. Yesterday’s data on the labour market implied that it remains tighter than before the pandemic. This has largely been driven by people leaving the workforce through the pandemic due to a range of factors, including Europeans returning home and older workers entering early retirement. The data showed that while nominal wage growth remains robust, real wages have fallen as higher inflation erodes real incomes.

Although there were some preliminary signs the labour market could be cooling. Labour demand was softer than expected, while the number of available vacancies fell on the previous months. The Bank will continue to watch this data closely as it looks to contain domestic sources of inflation.

Ultimately, it looks like the Bank will continue to raise rates through to the end of this year, increasing the probability that the UK will enter a recession in the fourth quarter.  

Bottom line:

It’s clear that the UK economy faces significant headwinds, which could make life difficult for domestically focussed firms. As we know, the UK stock market derives most of its revenue from overseas, and we continue to advocate favouring those larger global businesses listed in London whilst being more selective in the mid and small cap space, particularly those that are focussed more on the UK economy.

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