Inflation surprise points to need for equity investment

16 October 2024

UK inflation fell to 1.7% in September, its lowest level in three and a half years, raising expectations of further interest rate cuts, further stoking the need for savers to review their cash and equity investments.

Lower airfares and petrol prices were the main drivers behind the lower figures, the Office for National Statistics said. The average cost of passenger travel by plane fell by 5% in the year to September, having jumped by 11.9% in the 12 months to August, while petrol prices tumbled by 10.9% last month compared with a drop of 4.2% in August.

It is the first time inflation has dipped below the Bank of England’s 2% target since April 2021, paving the way for the Bank of England to cut interest rates. Markets are currently forecasting a cut of 25 basis points in early November.

Scott Douglas, capital markets director at Centrus, said the data offers a “much needed respite for consumers and businesses,” but all eyes will be on the Budget later this month.

Douglas said: “Despite some positive coverage around the government’s investment summit, concerns are looming over potential tax increases which could put downward pressure on economic growth, employment and wage growth. These measures, combined with lower inflation, could put pressure on the Bank of England to resume interest rate cuts at its next meeting in November.”

Ed Monk, associate director of Fidelity International, agrees a November cut to interest rates is likely.

Monk said: “Ahead of the inflation numbers the bond market was pricing in three to four quarter-point cuts before the end of next year, but that timetable may accelerate if inflation continues to undershoot the Bank of England’s forecast, which is for inflation to tick higher again this year before falling back to target next year.”

Monk said fund purchases by Fidelity clients demonstrate the appetite for cash and cash line assets, with cash and short-maturity bond funds featuring high among clients.

Monk said: “Inflation-beating interest on cash will no doubt have tempted some investors to move money from investments into savings accounts. The good news for those savers is that rates are likely to exceed inflation for a while longer. Market prices suggest this will be the case for all of next year, at least.

“But there’s also clear signs that the path for rates, including cash interest, is falling. In that context, it may be time for investors to rebalance their allocation of cash versus investments.”

James Lynch, fixed income investment manager at Aegon Asset Management, said that looking ahead, the data suggests that inflation could remain below the 2% target.

“Services inflation had been keeping headline inflation high but we are now starting to see this fall. If services continue to fall back to pre-pandemic levels and there is good reason to think it does then sub target inflation numbers could be here to stay over the medium term,” he said.

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