With the UK inflation rate having more than doubled in April, industry experts warn that inflationary pressures could increases as the economy opens up again, impacting financial plans.
Figures from the Office for National Statistics showed inflation jumped to 1.5% in April from 0.7% in March, marking its fastest rise since the pandemic broke out in March 2020.
According to the ONS, prices for both household utilities and clothing rose between March and April 2021, compared with a fall between the same two months a year ago.
Meanwhile, oil prices have risen from $20 a barrel last Spring to around $70 today, as demand and travel began to pick up.
While the latest figures remain below the Bank of England’s 2% inflation target, industry experts warned that it is likely to continue rising as the UK emerges from lockdown and the economy opens up.
Laith Khalaf, financial analyst at AJ Bell, said: “At current levels, inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road. For the moment, the Bank of England is dismissing consumer price increases as a natural bounce back from the depths of the pandemic last spring. But the economic recovery could be a Trojan horse, smuggling inflation into the UK, right under the nose of central bankers.”
The Bank of England has made clear that it will tolerate inflation rising modestly above target without affecting interest rate rises, however Khalaf warned that rising inflation may prompt markets to raise borrowing costs across the economy.
Khalaf added: “Inflationary fears have already started to trickle into markets, with the ten-year gilt now yielding 0.9%, up from 0.2% at the beginning of the year. If realised, a sustained inflationary period would be a paradigm shift from the last twenty-five years of extremely benign price rises, which have provided comforting mood music for stocks and bonds. Investors don’t need to hit the panic button just yet, but they do need to factor the potential for higher rates of inflation into their plans. Where inflation is concerned, it’s better safe than sorry.”
Steven Cameron, pensions director at Aegon, commented: “While this is still within the Bank of England’s 2% target it does serve as a cautionary tale for the direction of travel for inflation in the UK. As the door to the economy reopens the expectation is that consumers will rush to spend savings built up over lockdown. There is concern that this creates inflationary pressures that pushes rates well beyond both the target and anything that consumers have had to deal with in recent years or for many in living memory.”
Cameron said that a sustained period of low inflation has also blunted people’s fear of inflation.
“There’s now a growing realisation that high inflation could be around the corner, which reduces individual’s purchasing power and what they could buy with their savings over time,” Cameron explained. “Keeping money in the bank typically earns interest, but if the interest rate is lower than inflation, money or purchasing power is effectively being lost. With interest rates at historic lows, just scraping above zero, any amount of inflation raises challenges for savers.”
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Despite the doubling of the inflation print in April, the Bank of England won’t be too concerned yet. A significant part of the increase in inflation is due to the base effects versus last year when we went into lockdown and energy and petrol prices fell considerably. The Bank of England will expect this bout of price increases to be transitionary, and one that will likely resolve itself over the next six months as the economy re-opens.
“The risk, however, is that higher inflation expectations become ingrained among consumers and producers and we start to see wages increasing substantially as well. At that point, it is harder to argue that the inflation is transitionary and the Bank of England would have to react. As always, investors should have one eye on inflation risks and hold some sensible hedges as part of their diversified portfolio.”
Caution urged
With the outlook remaining uncertain, investment experts urged investors to be cautious.
Derrick Dunne, CEO of Beaufort Investment, commented: “For now, we can expect inflation to continue rising, with the potential to exceed its 2% target in the near-term, which could force the Bank of England to increase its base rate as a cautionary measure in the coming months. Investors should therefore ensure that their plans are equipped to perform in an inflationary environment, without placing too much confidence in any one outcome.”
Hinesh Patel, portfolio manager at Quilter Investors, said the data will likely be “noisy” and “all over the place” or at elevated levels for months to come and said investors will need to cut through the figures and look at the quality of businesses they are investing in.
“It is going to be difficult to tell when the Bank of England will buckle and reduce and remove the quantitative easing that markets have become so addicted to. Investors will need to watch their moves and messaging carefully to help them work out how markets might respond. But investors need to look through the inflation numbers and assess the quality of businesses and their underlying models before investing in them. Those built on strong foundations and have built up competitive positions will be the ones that will succeed in a robust inflationary environment.”
