相关文章，仅供参考Inflation - what you need to know
Marmite is something you either love or hate. But when it comes to inflation, opinions are divided. Data released this week show the headline rate of UK inflation hit 1 per cent in September — its highest level in almost two years — and economists forecast further rises as the full effects of the weakened pound are factored in.
In general, inflation is bad news for consumers — the price of anything the UK imports from petrol to high street fashions and electrical goods are set to increase, with last week’s spat between supermarket group Tesco and Unilever, one of its largest suppliers, catapulting the issue of price inflation on to front pages.
While there are no guarantees that wage rises will keep pace with the rising cost of living, long-suffering savers might hope that an environment where inflation is rising could eventually cause interest rates to move in the same direction.
There’s a mixed picture for investors. Inflation means asset-backed sectors such as infrastructure and property are in favour, although high demand is likely to lessen returns.
Described by one analyst as being “the enemy of economic growth”, rising inflation also means the UK economy’s reliance on consumer spending as a major driver could come under threat.
Here, FT experts examine the likely impact of rising inflation on your personal finances, including your wage packet, spending power, longer term savings and investments and the property market.1 What’s causing inflation to rise? How much higher could it get?
Delving into this week’s inflation data from the Office for National Statistics shows the higher-than-expected rise in September was driven by the increasing costs of fuel, clothing and hotel stays.
Drivers are already feeling the pinch at the petrol pump, thanks to crude oil prices having risen about 7 per cent in the past 12 months. But clothing was the big surprise, with prices rising 6 per cent in September alone.
“A year ago, the price of petrol was falling,” explains Alan Clarke, an economist at Scotiabank. “As those price decreases drop out, this pushes the headline rate of inflation up.”
Economists surveyed by Bloomberg expect inflation to rise steadily over coming months, with price increases climbing as high as 2.2 per cent, year-on-year, by mid-2017. Many economists forecast inflation will peak at between 3 and 4 per cent in 2018.
Sterling’s continued weakness against the dollar and the euro is the main reason. This is not showing up fully in inflation figures yet, but retailers and supermarket chains will have to pay more for imported goods as stocks in their warehouses run out.
Last week’s wrangle between Tesco and Unilever over the price of various household brands will not be the last, and consumers will have to bear some of the pain in the form of price increases.
The Bank of England targets a 2 per cent inflation rate. Last Friday, governor Mark Carney said he would be “willing to tolerate a bit of overshoot in inflation over the course of the next few years”.
In its August inflation report the BoE’s average forecast was that inflation would rise on the back of a depreciated pound to hit the 2 per cent target next summer before peaking at 2.4 per cent in summer 2018 and staying above target while higher import prices are gradually passed on to consumers.2 Will interest rates follow suit?
Even though price rises are overshooting expectations, economists do not widely expect the Bank’s Monetary Policy Committee to raise interest rates.
Until relatively recently, the expectation was that August’s cut in interest rates to 0.25 per cent could be followed by a further cut.
This would be the Bank’s only real ammunition to stimulate the UK economy, where growth is expected to slow even as inflation rises, recalling memories of 1970s stagflation — the toxic combination of high inflation and a stagnating economy.
However, markets imply the probability of a November rate cut has fallen to just 5 per cent.
The influential Ernst & Young Item Club believes the UK economy will expand by 1.9 per cent this year, with the growth rate slowing to 0.8 per cent in 2017. The same group forecasts that unemployment will rise from 4.9 per cent now to 6.7 per cent by the end of 2019.
Howard Archer, economist at IHS Global Insight, believes the BoE will make that final rate cut to zero — but not until the economy gets worse.
“I see a cut happening at the beginning of the year,” he says, pointing out that corporate and consumer confidence could deteriorate sharply in the lead up to March, which is prime minister Theresa May’s deadline for triggering the EU divorce process by invoking Article 50.
Meanwhile, by the turn of the year, Mr Archer expects the mood in Britain to have turned particularly sour as consumers find their shopping bills are rising while their wages are not.
“Companies are likely to keep a lid on wages to control their costs, as their earnings weaken and import costs rise,” he predicts. “The economy will increasingly lose momentum over coming months with Article 50 due to be triggered as tough negotiations with Europe weigh on confidence and increase uncertainty, so we see the BoE cutting rates early next year.”3 How will rising inflation affect the stock market?
The effect of inflation on shares is hard to predict, as there is no strong historic relationship between the two, points out Russ Mould, investment director at retail stockbroker AJ Bell.
“A little inflation is good, but lots of inflation is bad — at least if history is any guide,” he says. The prospect of stagflation in Britain makes the outlook more uncertain, he adds, as “those rare periods of deflation and stagflation [have] generated poor equity returns, especially in real terms”.
Investors should therefore consider buying the shares of companies that have the most power over their prices, he adds, as “they are best placed to cope with whatever scenario finally develops”. Examples of such companies, he says, would be Apple, as well as consumer businesses that produce household name brands, such as Unilever, Reckitt Benckiser or Coca-Cola.
He also favours companies selling goods that attract buyers because they are expensive (known as Veblen goods — luxury goods that do not follow the usual laws of supply and demand).
“Luxury goods firms such as Burberry or LVMH or Richemont are examples of this,” he says. “They offer clothes, perfumes, pens, bags or drinks which make people feel good about themselves and, better still, do it at a price point which only the plutocratic few can afford, potentially making them feel even better about themselves owing to the exclusive nature of their possessions.”4 Which investment sectors are the most inflation-proof?
The prospect of steadily rising inflation means it’s time to start buying “real assets” such as property, commodities and collectibles, according to analysts at Bank of America Merrill Lynch.
In a recent report the US bank says the values of “real” assets tend to rise in line with inflation, with prices going up alongside consumer prices. Michael Hartnett, BAML’s chief strategist, says that as government policy moves away from quantitative easing and towards tax-based ways of encouraging growth, real estate and infrastructure will be “direct beneficiaries”.
While infrastructure investment trusts have been a popular pick among professional fund pickers for some time, Thomas Becket, chief investment officer at asset manager Psigma, says buying equity in companies building infrastructure would also be a good inflation-proofing strategy.
“The point is that to protect against inflation at this time, you have to invest in companies that can definitely pass on the costs to consumers. With infrastructure they can put through the costs. Healthcare is another example.”
Darius McDermott, managing director at Chelsea Financial Services, adds energy companies to this list. “While they’re heavily regulated, the regulator will allow them to raise prices in line with inflation,” he says, adding that this will boost the attractiveness of utilities stocks or gas companies, and funds invested in these sectors, including Guinness Global Energy.
Commercial property splits opinion. Andrew Summers, head of fund research at Investec Wealth, last month told the FT that he was uncertain that rental growth could continue, but found inflation-linked property investments appealing. These include investment trusts buying buildings in the healthcare sector — NHS rents are often inflation-linked — as well as student accommodation, which could benefit from wealthy overseas students taking advantage of a weakened sterling.
Mr Becket of Psigma is less keen. “Commercial property is difficult because it depends on how the economy will perform after all this Brexit nonsense,” he says. “We hold the Schroders Global Property fund, but that was more of a yield play than an inflation play. We believed bond yields would remain low.”5 Which sectors could suffer as inflation rises?
Bonds are the asset class to avoid. Because their coupons are fixed, any inflation erodes income. Mr Becket says inflation-linked bonds — where both the value of the bond and the coupon are adjusted for inflation — are one way to remain invested in fixed income in an inflationary environment, but adds high demand means these investments are currently expensive and are likely to be more so.
Mr Summers at Investec agrees: “Inflation-linked bonds are only good if inflation exceeds expectations, because if everyone expects it then they buy them, the price goes up and the total return isn’t great.”
Analysts fear the retail industry could be particularly badly hit as it is an import-heavy sector, and relies on consumer confidence which is likely to be eroded by weaker house prices and reduced disposable income.
While stuffing money under your mattress may seem appealing, cash is the “worst” asset class in inflationary periods, says Mr McDermott of Chelsea Financial. “If inflation is between 2 to 3 per cent and interest rates don’t rise, £100 could be worth just £86 in five years,” he warns.6 Will wage inflation keep up the pace?
In normal times, you would expect wage growth to keep pace with inflation, since workers tend to ask their employers for bigger pay rises to account for the rising cost of living. Indeed, the very low inflation we have experienced in recent years helps explain why wage growth has been weak: employers have not been under pressure to offer bumper pay rises because even modest ones have given their staff a real-terms boost.
But economists do not think these are normal times. The Bank of England predicts unemployment will rise as a result of the Brexit vote, which might well dent employees’ ability and willingness to demand higher pay. City forecasters predict on average that nominal wage growth will slow from 2.2 per cent this year to 2.1 per cent next year.
“Employment growth is likely to slow and we suspect that the Brexit-related uncertainty will make firms reluctant to offer significant pay rises,” says James Knightley, an economist at ING. Productivity is the other unknown: if it remains weak in the UK, employers will struggle to raise salaries without hurting profits.
If economists are right, this means Britain’s workers are set for another pay squeeze: inflation will outstrip wage growth by the end of next year, making people poorer in real terms.
However, they might be proved wrong. The official jobs data show the unemployment rate is at an 11-year low of 4.9 per cent and job vacancies are near a record high. In addition, the National Living Wage will push up pay for people on the bottom rung of the ladder. It is scheduled to rise from £7.20 to about £8.60 an hour by 2020.7 How might pensions be affected?
Millions of pensioners relying on fixed incomes are vulnerable to a sharp uptick in inflation eroding their retirement income.
“Most people have annuities that provide a level income, rather than rise each year with inflation,” says Patrick Connolly, certified financial planner with Chase de Vere, the independent financial adviser. “With inflation rising faster than expected, those with level annuities may have to cut back their spending as their pension won’t go as far.”
Most final-salary schemes will have a cap on the pension increases they pay to members, so over the longer term very high inflation would erode the value of their pensions.
However, the estimated 13m people in receipt of the state pension have some protection in the form of the so-called triple lock, which guarantees that their income will rise each year by the higher of 2.5 per cent, average earnings or inflation until 2020.
Any adjustment will take time, though. Malcolm McLean, senior consultant with Barnett Waddingham, says: “Pensioners will not feel the benefits of the triple lock immediately, but they will have to wait until April next year when state pension increases are scheduled to take place.”8 Is there any point in being a cash saver?
It is becoming increasingly difficult to find a savings account that even matches the current rate of inflation, let alone any that exceed it.
Banks and building societies have made more cuts to savings products than rate increases for 12 months in a row, according to data provider Moneyfacts, which recorded 164 decreases in September.
It says that less than half of the 644 savings accounts currently on the market pay 1 per cent or more. Current accounts offer the highest rates on the market — up to 5 per cent — but only on limited balances.
Complaints by Mrs May that low rates are making savers poorer have led some to predict that next month’s Autumn Statement could bring new initiatives to help certain groups.
The under-40s already benefit from the Help to Buy Isa, and next April’s Lifetime Isa will offer a generous 25 per cent bonus to those saving for a home or pension. In the past, “pensioner bonds” have been issued as a sop to older voters. But for most people, taking on more risk and switching from a cash Isa to a stocks and shares Isa will be the only way to achieve growth.9 Is now the time to hit the shops?
If you’re looking to replace a big-ticket item, then yes. Retail analysts predict that those who have not already raised prices will do so within the next year, as the weaker pound forces up the cost of imports.
Most of the big retailers hedged their currency exposure before the Brexit vote. Combined with a good backlog of stock, many have been able to hold off raising prices so far. But the boss of high street chain Next says he expects prices to rise by 5 per cent next year as hedges expire, while the British Retail Consortium has warned that prices of clothes, meat and wine are all set to rise further.
Smaller retailers who did not hedge have raised prices already. “All our suppliers put prices up, and we’ve had to reflect that,” says the director of one small electricals retailer based on Tottenham Court Road. Pulling forward larger purchases could therefore be a prudent decision.
However, some larger players have raised prices already, including Apple, which lifted the price of the new iPhone and other products to UK customers.10 What will this mean for house prices — should I fix my mortgage now?
There is one aspect of the economy which is no stranger to rising prices: the housing market. This week’s ONS house price index put annual growth at 8.4 per cent in the year to August, up from 8 per cent in July and dwarfing the headline inflation rate, which includes rents but excludes house purchase costs.
With high demand for homes in an expanding economy, the east of England, the south-east and London are seeing the highest rates of house price inflation at 13.3 per cent, 12.2 per cent and 12.1 per cent respectively. But growth in even the most sluggish market, the north-east, is running at 3 per cent.
This is not a recent trend: across the UK prices have risen by 6.9 per cent a year since 1980, according to the ONS. But are faster rising prices for non-housing goods and services likely now to feed into house price growth, accelerating that well-established trend?
Housing market experts say the most probable impact would come indirectly, through the mortgage market. Borrowers are benefiting from record low rates on fixed-rate loans. If expectations grow that the Bank of England will try to control inflation by raising interest rates, borrowers may try to play safe by opting for a fixed-rate mortgage.
Richard Donnell, research director at housing market analyst Hometrack, says: “In the near term it’s probably going to give a shot in the arm for remortgaging as people rush to lock in rates. The five-year rates are looking really attractive at the moment.”
In terms of transaction volumes, though, inflation in consumer prices may damp confidence among potential house purchasers, sowing uncertainty and inertia. If people feel economic volatility and political turmoil is round the corner, they may prefer to hang back until predictability returns — particularly if wages are not keeping up with inflation. “More and more people will sit on their hands and wait to see what happens,” says Mr Donnell.