UK reaches 'turning point' as inflation rises

The UK’s 12-month CPI inflation rate rose to 0.7% in March 2021, up from 0.4% in the previous month, driven by higher fuel and transport prices.

Figures published by the Office for National Statistics (ONS) on Wednesday (21 April) show that the CPIH 12-month rate, which includes housing costs, rose to 1%, up from 0.7% in February.

Jon Hudson, fund manager of Premier Miton UK Growth fund, said the inflation rate should continue to rise amid high consumer demand post-lockdown and "supply challenges such as higher raw material costs, component shortages and increasing freight charges".

Quilter Investors portfolio manager Paul Craig argued the rise in inflation reflected a "turning point" in the UK's economic reaction to the coronavirus pandemic, with price growth "now on an upward trajectory, and should remain so for some time to come".

He added that inflation may move "markedly higher" if the end of lockdown restrictions leads to a "waterfall" of consumer spending.

However, if this is the case, Craig said this "should not evoke too much concern at the Bank of England", as the central bank will still need to "give the economy time to normalise before beginning to worry about inflation".

"We are a long way away from central banks moving interest rates higher, and indeed the MPC has said they will not tighten policy until the economy has made up its pandemic losses and the inflation target has been met," he added.

"This should give investors confidence to hold their nerve and remain diversified for the normalisation to come."

Financial analyst at AJ Bell Laith Khalaf agreed that "the spike in inflation is nothing to worry about", and this "upward pressure on inflation will continue to grow in the coming months, even if fuel prices are relatively stable now".

He added: "For the moment, inflation looks well contained, but if there is a shift in inflationary expectations, this would have big ramifications for investors and markets. Bonds in particular could suffer a hefty sell-off, as their fixed income streams are particularly vulnerable to inflationary erosion.

"Indeed, these safe haven assets have already seen significant price falls this year, as vaccine optimism has taken hold.

"The shares of companies reliant on distant cash flows could also find themselves under pressure, as the discount rate used to value those earnings rises. So while consumer price rises look subdued for now, investors should be on high alert for any signs of change.

"Inflation is a potential problem for 2022 rather than 2021, but if markets get a whiff of it coming down the road, prices could adjust rapidly."

Source: Investment Week