UK inflation falls slightly as petrol prices dip

Prices continue to rise at a 40-year high, but the UK’s inflation has eased slightly new figures this morning show.

Inflation fell slightly from 10.1% in July to 9.9% in August, the Office for National Statistics (ONS) announced this morning (September 14).

A fall in petrol prices was behind the drop in inflation, the ONS said, with wholesale costs falling after recesionary fears in the US impacted on the price of oil.

The Bank of England has said that inflation could rise to a peak of 13% this year.

Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, says there are mixed signals in the August inflation data.

“On the one hand, headline CPI inflation came in lower than expected, but the underlying core CPI measure remains stubbornly high, increasing the pressure on the Bank of England to raise interest rates by more than the 50bps expected by the Bloomberg consensus of economists when it meets on 22 September.

“Nevertheless, this August print does not reflect recently announced policy measures, which will have a material effect on future inflation readings. The new Liz Truss government delivered a significant intervention in the energy market, including a two-year ‘Energy Price Guarantee’ that fixes the average household bill at around £2,500 (based on typical usage) and lasts for two years, starting 1 October. This comes on top of a £400 energy rebate from the previous government under Boris Johnson.

“By ‘capping’ utility energy prices, this likely means that headline CPI inflation is set to peak earlier and lower than some economists had previously predicted. For instance, macro research house Capital Economics now estimates that headline annual CPI inflation peaks at 11.3% this November instead of a top of 14.5% in January 2023.”

Daniel added: “Lower inflation should give a little support to household incomes. Capital Economics also forecasts that annual real disposable income growth (including the energy price cap) declines throughout 2023 to reach a trough of -4.6% in the summer. This compares to a maximum decline of -6.5%, originally predicted without the price cap, towards the end of the year. Slowing inflation from high levels, and less potential downside in real take-home pay, is arguably a slightly better backdrop that some of the gloomy media headlines would suggest.

“For investors, the cost-of-living crisis and high energy prices are near-term risks to the UK economy. However, the UK economy is not the stock market. Many of the largest companies in the UK stock market have a global focus – around two thirds of UK large cap index earnings are from abroad.

“This means that many companies have relatively low exposure to the domestic economy. The UK stock market still looks cheap relative to many of its peers and a weak sterling exchange rate has boosted the value of US dollar earnings when repatriated back to the UK.

“Still, given the downside risk seen in consumer demand, it is probably prudent to steer away from consumer discretionary parts of the UK equity market and tilt towards opportunities in large cap UK stocks linked to raw material prices. For example, the MSCI UK energy index appears attractively priced and trades on a record low Price-to-Earnings ratio of 5.0 times earnings. This shows that, even during the current market turmoil, there are opportunities.”

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