‘UK’s rocky relationship with inflation may not be over’: Commentary

UK inflation figures have been released this morning, falling to 3.4% from 4%; here is some expert commentary from around the markets:

 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “The Consumer Prices Index (CPI) annual measure of inflation slowed significantly in February, rising by 3.4% in the year, compared with an annual rate of 4.0% the previous month.

“The slightly softer than expected data, driven mostly by moderating food price rises, represents another milestone on the journey towards lower UK inflation. Core CPI, which excludes volatile energy and food prices, also fell markedly to 4.5% from 5.1%, while the CPI services annual rate remained elevated but eased from 6.5% to 6.1%.
 
Where does inflation go from here?
 
“Inflation is set to further subside over coming months as higher interest rates continue to weigh on growth and household spending. Additionally, the fall in the energy price cap in April will see a reduction in utility bills and will bring a further step down in CPI to come within touching distance of the BOE’s 2% target.

“Looking further ahead the UK’s rocky relationship with inflation may not be over. The helpful base effects from energy and food are set to subside and the BoE is concerned that after falling to target, inflation may reaccelerate in the second half of the year.

“Wage growth stands to fuel this, rising at a still hot 6.1% in the three months to January. Although declines to the pace of wage increases are expected in the coming months, a hike to the minimum wage in April combined with fresh cuts to National Insurance could apply more upward pressure on services inflation, which has proved a perennial headache for the BOE. The Bank will be concerned these trends are not consistent with inflation hitting its 2% target sustainably.
 
What does it mean for interest rates?
 
“Interest rate cuts are undoubtedly on their way later this year as price pressures are showing clear signs of easing. We are therefore coming to the point where the Bank will be reviewing its stance on keeping rates in restrictive territory. A base rate of 5.25% would be at odds with price rises coming much closer to target, although there are lingering worries inflation could rebound if the employment market remains tight. Overall, the Bank will be eyeing lower rates but at the same time it will be cautious of declaring victory too early and letting inflation back out of the bag.

“Wages in the services sector are still running too high and the Bank is likely to want to squeeze these out of the system before risking a rate cut. Tightness in the labour market continues to be a problem feeding into this, and with tentative positive signs coming from the economy and consumer confidence reaching a two-year high the Bank will be wary that inflationary embers could be rekindled.

“Overall, it seems likely the balance of MPC members will lean towards keeping rates where they are for a couple more months as they await concrete evidence that wage growth and services inflation are falling back, which will more conclusively signal that price rises can sustainably return to target.
 
What does it mean for household finances?
 
“Mortgages and other forms of borrowing are not directly impacted by inflation, but many products are affected by expectations for BoE base rate, which is influenced by it. Recently, lenders have been increasing rates a little, after hopes of an earlier string of interest rate cuts receded. Today’s figures do little to move those expectations as they are already baked into market rates. However, if inflation remains on a downward trajectory and interest cuts arrive later this year as predicted, then borrowing cost should come down a little. Any falls will be modest compared to the steep rise since early 2022, though.

“For savers, there remains the prospect of a period of inflation-beating returns from cash as price rises continue to recede and interest rates remain elevated to ensure they do. However, it’s a case of making hay while the sun shines. The best deals for fixed term cash rates are now behind us as market looks ahead to a decline in BoE rates over the course of 2024. Cash can therefore be expected to lose its gloss versus assets such as bonds and shares as the year progresses.”
 
Lily Megson, Policy Director at My Pension Expert, said, “These are the figures consumers have longed for and at last mark a step in the right direction.

“However, to begin touting this as the onset of a ‘bounce-back’ year, to coin the phrase the PM used earlier this week, for savers’ wallets borders on delusional – after all, the bitter reality is that the cost-of-living crisis continues to drain Britons dry. Prices continue their upward trajectory, while wage growth remains stagnant, and economic instability feels inescapable for many.

“If indeed the economy is on the path to recovery, then the foremost priority should be ensuring that pension planners feel able to maintain a sense of financial security. Having access to the right support will be vital to this. The government must take more proactive steps to engage with the financial services sector in crafting policies that facilitate access to financial education and advice for Britons.”
 
Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, said: “This is the news consumers have been waiting for. After a surprise uptick in inflation to the year, it is positive to see this drop.

“We have moved closer to the Bank of England’s 2% target, so you’d be forgiven for thinking that things are going back to normal – but underestimate the lasting impact of high inflation at your peril, as the cost of living remains eye-wateringly high. After all, prices are still rising at pace, just not as fast as we’ve become accustomed to. Meanwhile, energy bills, property rental costs and slowing wage growth are all contributing towards a stubbornly difficult economic climate.

“All eyes turn to the Bank of England’s interest rate decision tomorrow. A cut to the base rate is on its way, but we can’t know for sure when that will happen. Now might be the last chance people have to fight back against the value lost from their savings by taking advantage of the higher rates of return—however, the clock is ticking.”

Latest inflation figures a relief but still hard yards ahead

Ben Laidler, analyst at investment platform eToro, said: “Headline UK inflation fell more than expected in February, in a relief to both the Government and Bank of England. There is also more good news coming, with the current 3.4% price rise set to fall toward 2% as UK energy prices fall sharply in the April reset. This will help keep the door open to the Bank of England cutting interest rates over the summer.

“The sharp February price deceleration was driven by easing food, restaurant, and recreation cost pressures, which was partly offset by gains in housing rents and petrol prices. It was a needed relief after inflation had stalled at 4% for the prior two months.

“But underlying core prices, that exclude volatile food and energy prices, was a reality check on the hard yards still ahead. This remains at the highest level among developed country peers at 4.5%, with services prices and wage growth still running uncomfortably high and the focus of Bank of England’s concern.”

“Bank of England may not have the luxury to wait for the Fed to make the first move in the rate cut cycle”
 
George Lagarias, Chief Economist at Mazars comments: “Inflation fell more than expected, across most categories. An economy in technical recession is more than balancing out building price pressures from external supply chains. While a pickup in producer output prices may give Andrew Bailey some pause, we believe that the overall figure brings the first rate cut closer. It is becoming obvious that the UK, much like Europe, is following a much shallower path in terms of growth and inflation than the US. The Bank of England, like the ECB, may not have the luxury to wait for the Fed to make the first move in the rate cut cycle, but rather choose to lead this dance themselves.”
 

COMMENT: Bank of England preview—softer inflation but no hope for rate cuts just yet

Daniela Hathorn, Senior Market Analyst at global retail trading platform, Capital.com:

“Both headline and core inflation rose less than expected in the UK in February. The data released on Tuesday morning shows consumer prices resuming the disinflation process after two months of higher readings. Year-on-year headline growth is the lowest in over two years.

However, the weaker CPI reading is unlikely to skew the Bank of England’s (BoE) immediate stance on policy rates. The reality is that inflation is still too high and the return to the 2% long-term target is proving to be a long and tricky process, meaning the BoE has little room to act. Output prices from producers continue to rise despite falling input prices, suggesting the possibility of further deviations from the declining trend in CPI. This is likely to keep BoE policy makers skewed towards keeping rates unchanged for the foreseeable future until significant progress has been made to reduce domestic price pressures.

GBP/USD has been stuck in a bearish channel for the past 10 days as the US dollar recovers some momentum. The pair has dropped back below 1.27 as traders buy into the dollar ahead of the Federal Reserve meeting on Wednesday evening. The stronger inflation readings in the US have pushed back on expectations of rate cuts given the resilience of the US economy and consumers. This has been favouring the dollar carry trade and pushing yields higher.

There could be some repricing after the meeting if the commentary from Powell has a slightly dovish tilt to it even as the economic data remains strong. The dollar side will likely continue dominating the momentum in GBP/USD. For GBP, there could be some bullish momentum on Thursday if we see any hawkish dissenters in the vote split, as well as Bailey reiterating that policy will need to remain restrictive.”