Today’s softer-than-expected inflation reading is positive for households and consumer confidence, according to investment professionals, but many warn against becoming complacent on the economic backdrop as it continues to outpace earnings. 
This comes after the latest reading of the consumer prices index (CPI) by the Office for National Statistics (ONS), which found inflation fell to 2.6 per cent in June from 2.9 per cent in May.
The largest driver of this was the falling oil price and its impact on fuel costs. That said, core inflation – which removes more volatile oil and food prices – also dropped from 2.6 per cent to 2.4 per cent in June.
Ian Kernohan (pictured), economist at Royal London Asset Management, described today’s inflation figures as “good news”. He said that, while the CPI is still above the Bank of England’s 2017 target of 2 per cent, it is nevertheless a sizeable fall from its recent peak.
“Although sterling is now close to its level of 12 months ago, some residual impact of devaluation is still feeding through,” he explained.
Performance of currency vs US dollar over 1yr
Source: FE Analytics
“However, with underlying inflationary pressures still low, we think that CPI is close to topping out, and the Bank will be happy to keep interest rates on hold.”
Adrian Lowcock, investment director at Architas, agreed that the inflation figures are good news for households bearing the brunt of rising prices. He also believes it is likely to kill off talk of the central bank raising rates any time soon.
“This would be welcome news to home owners, as mortgage rates are likely to stay low for longer, and should help support the UK economy as it gives households more certainty,” he reasoned. “But once again savers are the ones to suffer and will have to wait much longer to see a decent return on their deposits.”
The investment director said inflation appears to have now reached its peak and, despite the oil price impacting headline inflation, argued there are greater downward drivers caused by events outside of the Bank of England’s control.
“Going forward the oil price, which has been largely range bound for the past year, is less likely to have a significant impact on inflation,” Lowcock continued. “The weakness of the pound since the EU referendum is likely to continue to contribute to inflation for the coming months, but again this is beginning to drop out of the annual calculations.
“This was reflected in the fact housing and household servicing costs as well as clothing and footwear were negative for June, but continued to have some inflationary effects for the year.”
Neil Wilson, senior market analyst at ETX Capital, also said Monetary Policy Committee (MPC) hawks need to “cool their boots” following today’s lower-than expected inflation figures.
“[With sterling] having slid to around $1.26 after the general election, cable has been jacked up in the last month on bets that runaway inflation would force the Bank of England to raise rates sooner than previously thought and despite the risks to the overall economy from premature tightening,” he explained.
“A five-three split at the last MPC meeting and some fairly hawkish comments from some policymakers suggested the Bank was leaning closer to hiking this year, in part to correct what many felt was a premature cut to rates last year in the wake of Brexit.
“But today’s slowdown in price growth should squash any speculation of a rate hike for the time being. An August rate hike now looks highly unlikely, but we should remember that the Bank has only limited tolerance for continued above-target inflation and may yet seek to push rates back up to 0.5 per cent this year, if conditions in the wider economy improve whilst inflation remains above 2 per cent.”
Ben Brettell, senior economist at Hargreaves Lansdown, also pointed out that the fall in inflation has come at a time when the Bank of England’s rhetoric had started to become increasingly hawkish.
For instance, he said governor Mark Carney himself explained at the end of last month that “some removal of monetary stimulus is likely to become necessary”.
“Chief economist Andy Haldane also indicated he might support a rate rise this year. However if today’s pullback in inflation marks the start of a sustained decline, the pressure on the Bank to raise rates will ease,” Brettell reasoned.
“Three members of the rate-setting committee voted to raise rates last month, though this includes Kristin Forbes who stepped down at the end of June.”
While inflation eases the pressure for households, he said pay is still shrinking in real terms so consumers remain squeezed.
Last week, in fact, he pointed out that the ONS showed wages have been growing by less than inflation for three consecutive months.
“If inflation continues to moderate, this could bode well for economic growth – the UK economy is heavily reliant on the consumer, and economists had expected falling real incomes to eventually translate into lower retail sales,” the senior economist added. “If this fails to materialise the economy could see a stronger second half to the year.”
Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, said the real story is indeed UK wage inflation, where growth is still negative in real terms.
He said: “We see the Bank of England looking though the inflation data while trying to keep policy accommodative.
“Therefore, we would expect CPI inflation to head back down, getting closer to the targeted 2 per cent as we enter 2018.”
However, Maike Currie, investment director for personal investing, warned that investors need to focus on the longer-term picture before celebrating the fall in CPI between May and June alone.
“Today’s inflation numbers show CPI inflation rising from 0.5 per cent in June 2016 to 2.6 per cent a year later - that’s more than a five-fold increase in only a year,” she said.
“While inflation has eased back from May’s reading of 2.9 per cent, thanks largely to a fall in the oil price driving down the cost of fuel, this will be cold comfort for Britain’s cash strapped consumers - inflation is still well above the Bank of England’s 2 per cent target rate and outpacing our earnings.”
She also highlighted last week’s disappointed wage growth figures which, despite the UK’s unemployment rate reaching its lowest level since 1975, simply aren’t keeping up with the price of goods and services.
“Inflation also has implications for our savings and investments as it erodes the spending power of future interest and dividend payments and eats away at the worth of your original capital,” she continued.
“Inflation never looks like a problem until suddenly it is - the rapid rise in inflation in the last year is testament to this.”
Currie said physical assets such as gold, agriculture and property are all good protectors against the wealth-eroding effects of inflation.
For those looking to access gold mining shares, the recommended FE Alpha Manager George Chevely and Hanre Rossouw’s five crown-rated Investec Global Gold fund.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“The BlackRock Global Property Securities Equity Tracker fund invests in retail, industrial, office and residential property in addition to hotels and real estate service companies,” she explained.
“If you want to buy a slice of physical assets that could rise with inflation while still having some exposure to the stock and bond markets consider a multi asset fund which can blend equites, bonds with assets such as commercial property and commodities to cover most bases.”