UK CPI: October Update
James Mee comments on the latest figures
The UK announced a fall in inflation of 0.1% this morning, behind analysts' forecasts of 0%.
Much will be written about this, with many suggesting that rate rises look ever more distant (a point of view with which we agree) and calling to question the Bank of England’s ability to reach the 2% target. Indeed, the market seems to think so: yields on the 10Y Government Bond have tightened by 1.2 basis points to 1.81%* at the time of writing.
In analyzing the latest inflation print properly, we break down CPI into its component parts. Having done so, it is interesting to note that the main detractor to consumer prices was transport, falling 2.5%, with the main price decrease coming from air travel (-20.4%). Food & Non-Alcoholic Beverages posting a 0% print having been consistently negative through most of 2015 is also notable.
The key reason for falling air (and sea) travel prices is the second order effect of falling commodity prices, most notably oil: as these input prices fall, airline (and ferry) companies can pass on lower prices to consumers. As regards Food & Alcoholic Beverage prices flattening, this is likely due to a slower pace of price cutting by major supermarket chains.
Having analysed the data, we do not believe there will be a sustained deflationary swing. We expect inflation to pick up moderately as and when there is a stabilisation of commodity prices, but that it will remain structurally lower for longer.
** All other figures sourced from Factset
The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
The information contained within this document relating to ‘yield’ is for indicative purposes only. Clients should note that yields on investments may fall or rise dependent on the performance of the underlying investment and more specifically the performance of the financial markets. As such, no warranty can be given that the expressed yields will consistently attain such levels over any given period.
Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed.