Smith & Williamson’s Wells: ‘Unquestionably bad’ inflation putting downward pressure on demand
“UK inflation remains elevated, in line with our expectations. We continue to view the post-referendum weakness in sterling as the key driver of the recent spike in inflation, putting pressure on household budgets.
“This is unquestionably bad for consumers, especially when combined with the recent increase in interest rates pushing up mortgage repayments. We therefore expect conditions to remain tough, putting downward pressure on demand, and hence inflation, over the next six months.
“Having said that, UK politics cannot be ignored. As we have highlighted in previous comments, items that are linked to the higher RPI measure and re-set annually in January – such as rail fares – will go up with a bump, unless the government intervenes. This seems unlikely given that the government has an explicit policy objective to shift rail funding from tax payers to rail users. Equally, it should not be forgotten that the government is abandoning the public sector pay cap, which is likely exert upward pressure on prices.
“Inflation protection in the form of index-linked gilts remains expensive but investors can find inflation protection at a reasonable price if they are prepared to cast the net beyond the UK.”