Maike Currie, Fidelity Comments on the 2.9% Inflation

Maike Currie, investment director for personal investing at Fidelity International, said: “The tightening squeeze on cash-strapped UK households continues, with August’s inflation figure showing the CPI (Consumer Price Index) climbing to 2.9%, far out-pacing the growth on our pay packets. The spike in prices is due to rising prices for clothing and petrol. The holiday season also saw a rise in air fares.

“The thorny issue of inflation will be the driving force behind any rate rise decision on Thursday.  Economists have suggested that now is finally the time that the Bank takes a more hawkish turn, after eight and a half years of ultra-loose policy.

“Whether or not the Bank talks tough, there is little sign that markets are ready to buy it. In fact the difference in outlook between the bank and investors is becoming pronounced – despite the Bank’s repeated warnings about needing to raise rates sooner and faster than markets expect, markets are pricing in that they will stay at their current 0.25% level until the end of 2018, and not rise above 0.5% until 2021.

“Investors remain sanguine about inflation returning with a vengeance, believing any rise will be fleeting as the impact of the weaker pound following last year’s Brexit vote falls out of the equation. Then there are long-term structural trends likely to keep a lid on inflation like an aging population limits the size of the global workforce, which by corollary suppresses economic activity. Then there’s the fact that rising inequality and the growing cohort of self-employed people with limited earning power, such as Uber and Deliveroo drivers in the so-called gig economy, means less money to spend. Less economic activity, and less money spent, means prices are unlikely to be driven upwards, keeping inflation low over the long term.  

“Fleeting inflation and tepid economic growth, means the Bank of England is unlikely to turn off the taps of monetary stimulus too quickly. So despite the hawkish crows, the doves should continue to rule the roost. That’s good news for borrowers, bad news for those leaving their money languishing in cash and even more reason to stick with a seasoned stock picker who can roll up their sleeves and use the resources and insight at their disposal to unlock those ever elusive returns.”