UK inflation hits highest level since March 2012
Food prices, clothes, transport (oil) and recreation biggest contributors
Could be a sign that the bull market is moving into its final stages
Russ Mould, investment director at AJ Bell, comments:
“Inflation is proving sticky and today’s 3.1% reading at least helps to justify the Bank of England’s decision to push through its first interest rate increase in a decade in November.
“The pound may have strengthened since its post Brexit vote lows but it remains weak by historical standards and this continues to inflate the costs of food, clothing and leisure activities.
“At the same time the price of oil continues to march higher from its low point in 2015 and, at $65, is now at its highest level since April 2015. This is feeding through to higher transport costs for UK consumers.
“With average wage growth running below inflation and an interest rate hike starting to increase mortgage repayments for many, UK consumers will be starting to feel the pinch.
“The Governor of the Bank of England, Mark Carney previously said he expects inflation to peak around October and so will be disappointed to see inflation continuing to rise.
“Sterling has spiked higher this morning, back toward the $1.34 mark against the dollar and the benchmark UK 10-year Government bond, or Gilt, yield has also gone higher, rising by a couple of basis points to 1.22%, to suggest investors are wondering whether the Bank of England may have to move more quickly on interest rates in future.
“If inflation does persist, or even accelerate, that would be a huge surprise to investors and not necessarily a nice one. The Fed is already increasing rates and has switched from Quantitative Easing (QE) to Quantitative Tightening (QT) by shrinking its balance sheet, the European Central Bank is slowly tapering its QE scheme and even the Bank of Japan (BoJ) is dropping hints it may be time to back away from its full-throttle stimulus programme.
“Any faster-than-expected removal of central bank liquidity could be a shock to a range of asset classes – stocks, bonds, cryptocurrencies, art, you name it – which have feasted off cheap money and a sustained increase in inflation could be an early signal that the bull market party is moving into its final phases.”