Why UK inflation at 3% could be bad news for UK stocks

Javier Howell
February 14, 2018

Higher inflation could prompt the Fed to raise rates more frequently to stop it from soaring.

On a month-on-month basis, the NBS said the Headline index increased by 0.80 per cent in January 2018, or about 0.21 per cent points higher from the rate of 0.59 per cent recorded in December 2017.

As per use-based classification, the growth rates in December 2017 over December 2016 are 3.7 per cent in primary goods, 6.2 per cent in intermediate goods and 6.7 per cent in infrastructure/construction goods.

"There is so much noise by the policymakers in the market that, ok, perhaps the United Kingdom is ready for another interest rate hike -by no means is the United Kingdom economy ready for another interest rate hike", Aleem said. United Kingdom 10-year government bond yields widened 0.19% to £1.604. However, it was healthier than the 2.4% growth clocked in the year-ago period.

Interest rates have been historically low for years. But inflation expectations had already been rising, even though the Fed's preferred inflation measure, PCE deflator, has been relatively tame at about 1.5 percent, below the Fed's 2 percent target. No one's sticking their neck out among the forecasters.

CARE Ratings chief economist Madan Sabnavis said this should be read with caution.

Nikesh Sawjani, an economist at Lloyds Bank Commercial Banking, said the ONS figures backed up the view that the downtrend in inflation is likely to be very gradual. The MPC acknowledged for the first time the risk that "the contribution of imported inflation pressures would diminish more rapidly than in the central projection".

Despite the market's jitters, inflation isn't yet much of a threat to consumers.

Inflation in the food and beverages segment of the CPI eased marginally to 4.58% in January, from 4.85% in the previous month.

Vegetable prices moved up at the rate of 26.97% in January from 29% in December, fruit prices too accelerated at a slower pace of 6.24% against 6.63% in December.

Inflation is now the enemy of stock investors.

TUC General Secretary Frances O'Grady said: 'Inflation is still outpacing wages and working people's living standards are falling fast.

United Kingdom inflation is starting to slip - but not as fast as many would like.

For the market to react strongly, he said, the number would have to be a major surprise and show areas where prices could rise persistently, not just one-off instances.

The yield on 10-year Treasuries rose to 2.86 percent, while US stock futures fell, as the figures renewed investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated.

When you register we'll also send you a free e-book-Writing with punch-which includes some of the finest writing from our archive of 22 years. "That clearly excited markets, but we don't think that will pass through that quickly into service inflation any time soon".

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