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UK inflation is, we believe, going to be a major consideration for investors in 2018. It has now hit its highest level since March 2012, with food prices, clothes, transport and recreation being the biggest contributors. UK inflation has also prompted the Bank of England to raise rates, with the expectation of more to come in Q1 next year.

The pound may have strengthened since its post Brexit vote lows but it remains weak by historical standards and this will continue to inflate the cost of food, clothing and leisure activities.

But there is the oil market to consider too. The price of oil is now at its highest level since April 2015. This is feeding through to higher transport costs for UK consumers.

“With average wage growth running below inflation and an interest rate hike starting to increase mortgage repayments for many, UK consumers will be starting to feel the pinch,” says Russ Mould, Investment Director at AJ Bell.

IS UK Inflation set to go higher this winter?

Steady inflation will not be good news for Mark Carney, Governor of the Bank of England. He told the market he thought inflation would peak in October. We at The Armchair Trader don’t see it that way: there are some fundamental forces lining up behind the energy markets which will see prices going higher over the rest of the winter, and this will keep inflation high.

“The upward trend in inflation is likely to continue as consumer spending increases over the Christmas period,” says Ed Anderson, Senior Executive Officer FXPro. “2016 saw UK Christmas spending hit a record £77.56 billion which is likely to be surpassed this year. This will, undoubtedly, put more upward pressure on prices.”

Anderson thinks inflation will likely top out at 3.5%, but he says the quandary will remain as to how the Bank of England can lower inflation without severely impacting growth.

The GBP and UK bond yields have risen, which analysts reckon means that the Bank of England may be forced to raise rates sooner than expected. Conventional wisdom had a rate hike projected for March.

“If inflation does persist, or even accelerate, that would be a huge surprise for investors and not necessarily a nice one,” adds Mould.

Neil Wilson, Senior Market Analyst at ETX Capital thinks we are seeing UK inflation peaking at 3.1%. “It will only get really interesting if it persists at the 3% level longer than planned,” he comments.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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