Has inflation peaked?

Maike Currie
Maike Currie
Fidelity Personal Investing16 January 2018

Today’s inflation figures showing price pressures easing off in December 2017 to 3%, means Mark Carney can put away his stationery for now. Unlike the previous month when inflation hit 3.1%, forcing the Bank of England governor to write a letter explaining to the Chancellor why inflation is more than a percentage point above the Bank’s 2% target. The letter is expected to appear alongside February’s inflation report.

Of course, whether or not Carney pens a letter to the Chancellor matters little to the average UK household. Prices are still high, not least when it comes to basics like food and fuel, and this is putting the squeeze on consumers. In fact, if you were enjoying your breakfast this morning you’ll be alarmed to know that it’s got a lot more expensive with coffee, tea and cocoa up 9.5% and oils and fats (including butter) up 11.1%, while cooking it all is equally costly with electricity up 11.4%.  

Beyond drilling into the detail of why life has got a lot more expensive, the reason why inflation is hurting consumers is because price rises continue to outpace wage growth, which including bonuses is hovering at around 2.5%. This means cash-strapped consumers are still suffering a pay cut in real terms.

If this all makes for rather depressing reading - there is some light at the end of the tunnel. Inflation could soon be turning a corner. The first reason is because one of the main drivers behind price rises has been an increase in the cost of food. This is a direct consequence of the fall in the pound in the wake of Britain’s decision to leave the EU. But the nature of currency-driven inflation is that it tends to be self-correcting.

The comparable figures only look bad for a year. After that the one-off sterling-related adjustment will fall out of the comparisons - so the inflationary impact of a depreciating currency is short-lived. Yesterday, sterling rose above $1.38 for the first time since the Brexit vote helped by a weaker dollar and fears over the UK’s break from the EU cooling.

Second, with our pay packets not rising as fast as prices, we’re feeling progressively poorer as each month rolls by and this inevitably means we’ll spend less. Less consumption, in time leads to weaker inflation.

So there’s a very good chance that 3% might be the peak for inflation. The other drivers of inflation, such as an overheating jobs market, are simply not in evidence.

Beyond these factors, there are longer-term economic trends that cannot be ignored. First, an aging population limits the size of the global workforce, which by corollary suppresses economic activity. Meanwhile, rising inequality and the growing cohort of self-employed people with limited earning power, such as Uber drivers in the so-called ‘gig economy’, means less money to spend. Less economic activity, and less money to spend, means prices are unlikely to be driven upwards, keeping a lid on inflation over the long term.

If inflation falls and economic growth remains tepid, there will be little reason for the Bank of England to risk the economic recovery by putting up interest rates any time soon. Good news for borrowers, bad news for savers and even more reason to stick with a seasoned fund manager who can roll up their sleeves and use the resources and insight at their disposal to unlock those ever elusive returns.

If you’re looking to make your savings work harder, one option is an equity income fund which invests in company shares that pay investors regular dividends that can be reinvested or paid out. The Fidelity Global Dividend Fund is a solid option for someone looking for an equity income fund that benefits from a global approach. Manager Dan Roberts scours the globe for attractive income streams but never compromises on quality given his razor sharp focus on preserving client capital. It features on our Select 50 of recommended funds.

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