Analysts caution against confidence in inflation dip

Mark Dampier, head of research for Bristol-based Hargreaves Lansdown, said despite the "surprise" inflation fall to 0.9 per cent, investors and their advisers should expect inflation to be "on a rising trend" over the next few quarters.

While the 0.9 per cent consumer price index (CPI) figure was down from September's 1 per cent, Mr Dampier said there was every expectation that goods sold in six to 12 months' time would be "more expensive than today".

The cost of raw materials is rising and has already affected the price of goods from fish fingers to Toblerones. Adrian Lowcock

He pointed to data showing input prices rose 12.2 per cent in the year up to October from 7.3 per cent in September, which indicates that the CPI will see higher figures over 2017, perhaps even beating the Bank of England's target rate of 2 per cent.

Mr Dampier commented: "A more important question to ask is will rising inflation cause the Bank of England to raise rates?

"I think it is unlikely. We need to remember sterling’s drop, assuming it doesn’t continue to plummet, is a one-off factor, which will fall out of the year-on-year calculation in 12 months’ time.

"We saw a similar scenario in 2008 when inflation hit 5.6 per cent, mainly due to high commodity prices. The Bank was tested again in 2011 when inflation reached 3.87 per cent, but still interest rates did not move. Both moves were considered blips rather than a sign of persistent high inflation."

Even with suggestions that President-Elect Donald Trump's policies might affect interest rates in the UK and Europe, Mr Dampier did not think the UK would see a significant knock-on effect on inflation or interest rates. 

Adrian Lowcock, investment director for Architas, also warned investors and advisers not to be "lulled by the drop in the headline inflation rate".

Mr Lowcock commented: "The weak pound has not fully been reflected in prices in the UK as retailers have been reluctant to pass on the full cost of price rises.

"The recovery of the oil price is driving up transportation costs compared to 12 months ago. The cost of raw materials is rising and has already affected the price of goods from fish fingers to Toblerones.

"We expect this to be reflected in a wider range of goods over the coming months with retailers expected to raise prices significantly after Christmas.”

Although some forecasts have suggested inflation could peak at 4 per cent, Mr Lowcock is not sure this will be the case. However, he warned: "While the Bank of England currently predict 2.7 per cent, this is more bad news for savers as inflation destroys the value of cash.

"Inflation at 3 per cent will halve the spending power of cash in 23 years.”

James Carthew research director QuotedData, has suggested advisers might like to consider inflation-proofing their clients' portfolios with certain funds that are likely to weather movements in interest rates, sterling and inflation.

He comments: "UK mid cap trusts were badly hit in the wake of the referendum vote, but therein also was an opportunity for fund managers. Seneca Income & Growth (SIGT), has a multi-asset portfolio that includes some UK equities.

"Its net asset value (NAV) was not immune to the market’s post-Brexit gyrations but, as markets have settled, its UK mid-cap holdings have recovered strongly.

"SIGT’s NAV is now some 7 per cent above its pre-referendum level thanks to the actions taken by its managers. They are finding opportunities in property as well as exploiting the longer-term potential in infrastructure.

"These assets should also offer an element of inflation protection, while the managers are avoiding investments in long-term fixed interest securities."