UK Inflation Remains High – Reactions from Wealth Managers

New evidence emerged yesterday on how inflation is back with a vengeance, producing the kind of numbers not seen since the 1970s and 80s, and raising questions about how wealth can be protected in such a environment.

Official figures yesterday showed UK consumer price inflation rose 9% in April from a year earlier. There’s a toxic mix of supply chain disruptions, high central bank money printing (“quantitative easing”), pandemic lockdowns, net zero energy policy and Ukraine’s invasion of Ukraine. Russia – a major food producer. Central banks such as the Bank of England face a big challenge in determining how much of this inflation problem is due to “one-off” factors and how entrenched inflation expectations are. Those who are able to remember the 70s and 80s know that inflation is a very difficult entity to kill without economic pain. A German central banker once said that inflation is like toothpaste – it’s hard to put it back in the tube.

Here are comments from various quarters on the numbers:

Julian Jessop, Economics Researcher, The Institute of Economic Affairs, a think tank
The jump in consumer price inflation to 9% in April was not as bad as some had feared, but the surge in the cost of living remains extremely worrying. Without more action from the Bank of England and the government, this crisis could get even worse. It is the Bank of England’s job to worry about the overall level of inflation. Much of the commentary on today’s data focuses on the individual prices that are rising the most, most notably the cost of energy. But monetary policy has also been too accommodative, for too long.

Central banks may not be able to do anything to prevent external shocks, such as war in Ukraine or soaring global food prices, but they can keep monetary growth in check, so higher inflation in certain sectors be offset by lower inflation elsewhere.

Strong and decisive action can also help ensure that inflation expectations remain low. On the other hand, the slow reaction of the Monetary Policy Committee has undermined credibility and increased the risk that a temporary jump in inflation will persist for longer. Moreover, lower inflation expectations in the future can also reduce inflation now. If companies are more convinced that the rise in inflation will be temporary, they are more likely to absorb cost increases rather than pass them on.

In the meantime, the government can do more to protect the most vulnerable. The Chancellor can still hope to wait until autumn before taking other measures. After the rise in April, domestic energy bills are now at least capped until October. In the meantime, there is already more help to come in July, when the National Insurance payment threshold is raised (a tax for low incomes).

However, the cost of living crisis has now spilled over into food prices, and inflation is expected to stay higher for longer than forecast in the spring statement. Consumer confidence is also so fragile that it would perhaps be too risky to postpone the announcement of additional aid until the fall.

Silvia Dall’Angelo, Senior Economist, Federated Hermes
Overall, inflation has become more pervasive, pointing to a further worsening of the country’s cost of living crisis.

Over the coming quarters, stagflationary momentum will increase for the UK economy. Inflation is expected to remain stable at around current levels for the remainder of the year, reflecting external and, to a lesser extent, domestic price pressures still ongoing. The exogenous price shock for energy and food commodities will continue to feed through to consumer prices – in particular, another large adjustment to the utility bill ceiling is scheduled for October. Meanwhile, a tight labor market will continue to fuel near-term wage pressures. At the same time, demand is expected to slow sharply in the coming quarters, reflecting pressure on real incomes from high inflation itself, fiscal and, to a lesser extent, monetary tightening.

Our base-case scenario is that stabilizing energy prices, base effects, some easing of global supply constraints and, crucially, slowing demand will all contribute to lower inflation in 2023. However, it will remain above the target, given the high starting point. Policymakers in the UK will struggle to calibrate the right mix of policies to deal with the extreme short-term growth-inflation trade-off they face. Stagflationary momentum could set the stage for a recession that would eventually bring inflation under control the hard way.

Dolores W. Simon