Inflation rises again as investors turn to equities

By Jessica Tasman-Jones

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May 16, 2017

UK inflation’s rise to 2.7 per cent in April undermines the case for gilts and bonds, but could provide ideal conditions for a potential return of the “cult of equity”, investors say, as Easter travel boosts figures.

The rise is the largest year-on year increase since 2007. A year ago inflation was 0.3 per cent.

Today’s inflation bulletin from the ONS feels somewhat like Groundhog Day,” says Hargreaves Lansdown senior economist Ben Brettall, as sterling weakness continues to feed through.

Paul Mumford of Cavendish Asset Management says the figure reduces the appeal of gilts and bonds.

“With yields below the rate of inflation, capital is effectively being eroded. These are ideal conditions for a potential return of the cult of equity, which although riskier, looks favourable in current market conditions.”

Most observers believe today’s figure does little to indicate the Bank of England will deviate from its current course.

With little sign of overheating in the domestic economy, and only one MPC member voting for higher rates at last week’s policy meeting, it seems rates will be stuck at 0.25 per cent for some time, Hargreaves’ Brettall says.

IHS Markit chief economist Howard Archer says they expect the monetary policy committee to sit tight on interest rates through 2017 and 2018 – and possibly well beyond.

Archer forecasts inflation will still hit 3 per cent, arguing sterling’s fall since last June still hasn’t fully fed through with appreciable price pressures built up further down the supply chain.

But Viktor Nossek, director of research at WisdomTree in Europe, believes inflation has peaked, barring a shock from energy prices or further devaluation of the pound.

Michael Baxter, economics commentator for the Share Centre says average wages are likely to have fallen in April in real terms, when the data is released next week.

Airfares were a key contributor to April’s figure rising 18.6 per cent year-on-year.

Core inflation also jumped over the period from 1.8 per cent in March to 2.4 per cent in April.

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