Game on Inflation
Insights

Game on Inflation

As the dark days of winter recede and Spring is sprung, central bankers have been scurrying out of their burrows to share the good news that the time of high interest rates is nearing its end. And, waiting just over the horizon is a warm glow of interest rate cuts. One after another, the US Federal Reserve’s Jay Powell, the ECB’s Christine Lagarde and the Bank of England’s Andrew Bailey, have opened up on how the Fed “is not far” from cutting rates, ECB officials back a June rate cut but are “keeping the door open for April,” and UK investor’s bets on rate cuts this year are “not unreasonable.123” All welcome news. For the moment, however, we will focus our attention, at home, on the UK.

On 14 February, Valentine’s Day in the UK, the Office for National Statistics reported that the Consumer Price Index (CPI) rose by 4.0% in the 12 months to January 2024, holding steady at the same rate as in December 2023. That rate, 4.0%, is still above the BoE’s target, 2%, but it’s a dramatic improvement on the 10.1% rate of a year ago. Even before that data was published Governor Bailey speaking in February, shortly after a BoE meeting, said “inflation could ease to its 2% target within a few months.” It’s a view we share. It could arrive as soon as April, and potentially fall below 2%.

Supporting that prognosis, we’d cite a number of forthcoming events. From 1 April 2024 (to 30 June) OFGEM’s price cap will fall 12%; the price for energy a typical household, who use electricity and gas and pays by Direct Debit, will go down to £1,690 per year. This is £238 per year lower than the price cap set between 1 January to 31 March 2024 (£1,928)4. A similar fall is not out of the question in July. Staying with energy, the 6 March Budget saw the Chancellor freeze fuel duty again for another 12 months5. Duty is charged at 52.95p a litre, an amount that was cut by 5p in 2022 by the then chancellor, Rishi Sunak, after prices spiked following Russia’s invasion of Ukraine. 

Taking the temperature with business heads

Hot on the heels of the Budget, the BoE released its Decision Maker Panel survey of Chief Financial Officers from small, medium and large UK businesses (firms across the whole economy, not just consumer-facing), on 7 March6. A temperature check taken between 2 and 16 February, the 2,373 influential heads of business respondents, said they expected their output price inflation to decline by 1.1 percentage points over the next 12 months (based on three-month averages).

Annual wage growth was put at 6.7% in the three months to February, down 0.1 percentage point from the three months to January. More importantly though, the firms surveyed said they expected their wage growth to decline by 1.5 percentage points over the next 12 months (based on three-month averages). A slight fly in the ointment was the expected year-ahead wage growth figure to still be unchanged at 5.2% (on a three-month-moving-average basis) something the BoE is tracking but the direction of travel thereafter should be down. Before the COVID-19 pandemic, when inflation was close to the BoE’s 2% target, annual growth in basic pay was around 3%.

Annual employment growth of 2.3% was reported in the three months to February, down on the 2.4% reported in the three months to January. Expected year-ahead employment growth was 1.6% in the three months to February, down 0.1 percentage points from the three months to January. The survey results align with other signs that Britain’s job market is cooling, a development which should broadly ease pressure on wage growth and provide some comfort to BoE policymakers.

A few sticky issues

There are some exceptions. A rise in the National Living Wage (NLW) by 9.8%, in April, serves as a stimulus and in the battle to retain retail staff a slew of supermarkets including Tesco, Co Op, Sainsbury’s, Asda, Aldi, Lidl, M&S and Waitrose, have all announced salary increases of above the NLW level 7,8,9. The impact of these large, low-wage employers could push CPI inflation back to above 2.0% towards the end of the year but ahead of then inflation should drop.

The heavily trailed 2p cut in national insurance could have been viewed as inflationary also but with a number of small tax increases on items such as vaping, tobacco and holiday home lets amongst other things, the overall impact can be broadly assessed as neutral10.

Headlines services inflation has been another slightly sticky issue. At 6.5% in January, it has come down only slightly from its peak of 7.4% in July 2023. As the cost of services/bills index-linked to inflation, such as mobile phone contracts, some rents and property insurance charges, rise less than last year, however, this figure too should start to decline more meaningfully.

Maybe it is Spring and the hope and renewal it unleashes, or just good old-fashioned analysis based on intense research, but we are of the opinion that inflation is now headed decisively lower. As a result, we have sold out of all our inflation-linked gilts and replaced them with nominal bonds. We like the duration component of the inflation-linked bonds but not the inflation-linked component, as we don’t believe the expected fall in inflation is fully priced in.

22 March 2024
Keith Balmer
Keith Balmer
Portfolio Manager
Share article
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Key topics
Related topics

PDF

Game on Inflation

1 Jay Powell says Federal Reserve ‘not far’ from having confidence to cut interest rates (ft.com) 7 March 2024
2 BOE Can Cut Rates Before UK Inflation Returns to Target: Bailey – Bloomberg 20 February 2024
3 Christine Lagarde signals June rate cut as ECB lowers inflation forecast (ft.com) 8 March 2024
4 Changes to energy price cap between 1 April to 30 June 2024 | Ofgem publication date 23 February 2024
5 Hunt extends fuel duty freeze and raises premium air passenger duty (ft.com) 6 March 2024
6 Monthly Decision Maker Panel data – February 2024 | Bank of England publication date 7 March 2024
7 National Minimum Wage and National Living Wage rates – GOV.UK (www.gov.uk) as at 8 March 2024
8 John Lewis and Co-op to increase minimum pay for staff – BBC News 7 March 2024
9 Tesco latest supermarket to increase staff pay – BBC News 6 March 2024
10 Budget 2024: UK taxes head for highest level since 1948 despite Hunt’s NI cut | Budget 2024 (spring) | The Guardian 6 March 2024

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

Related Insights

16 April 2024

Adam Norris

Investment Manager

Fund Watch Q1 2024

We analyse thousands of funds each quarter – in FundWatch we highlight the elusive few that manage to outperform on a consistent basis.
Read time - 8 min
15 April 2024

Steven Bell

Chief Economist, EMEA

Is interest rate pessimism overdone?

The European Central Bank looks set to cut in June and there are reasons to believe the US and UK won’t be too far behind.
Watch time - 6 min
12 April 2024

Anthony Willis

Investment Manager

Multi-Manager People’s Perspectives: Is the US economy running too hot to allow the Fed to cut rates?

It has been a tougher week for equities and bonds, particularly in the US, as economic data once again weakens the narrative around interest rate cuts being just around the corner.
Read time - 4 min
17 April 2024

Jamie Jenkins

Managing Director, Head of Global ESG Equities

In search of sustainability – following Highway 101

Travelling down the US west coast we met 25 companies in five days. Learn more about the tech and healthcare businesses shaping our future.
Read time - 3 min
16 April 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – April 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
16 April 2024

Adam Norris

Investment Manager

Fund Watch Q1 2024

We analyse thousands of funds each quarter – in FundWatch we highlight the elusive few that manage to outperform on a consistent basis.
Read time - 8 min
true
true

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium