Today’s increase in inflation is the first real evidence of Brexit and rising oil prices hitting people’s wallets.
The impact of the plunge in sterling and rising oil prices feeding through to fuel showed in the macro data this morning, as the latest consumer price index figures for September showed that price levels rose to their highest level in two years.
The latest inflation figures from the Office of National statistics showed September headline inflation came in at 1 per cent year on year, above expectations of 0.9 per cent.
Core CPI also accelerated to 1.5 per cent year-on-year, above expectations of 1.4 per cent.
Clothing and footwear was a big driver of the increase, suggesting the weakness of the pound has started feeding into import prices.
But, what does this mean for your clients?
Dr Richard Theo, CEO at Wealthify , warned the inflation announcement comes at possibly the worst time for long-suffering savers who are already earning next to no interest on their cash with typical easy access savings rates offering 0.01 per cent.
Combined with inflation at 1 per cent, Dr Theo said people are now seeing an almost 1p drop in value in each £1 they’ve got saved.
He said: "More than ever, people must now take a hard look at how they are managing their money and explore alternatives to cash savings that can help them beat low interest rates, beat inflation and make their money work for them.”
Anna Stupnytska, global economist at Fidelity International, said investors should realise inflation is only likely to get worse and further erode their income.
She said: “Given the recent fall in the pound, around 23 per cent since late 2015 and 17 per cent since the Brexit vote, inflation is set to accelerate further, rising by around 1 to 2 percentage points from these levels.
“Inflation is likely to hit the Bank of England’s target of 2 per cent in 2017, before overshooting and peaking sometime in 2018. Further falls in the pound could accentuate this trend.
“With personal incomes growing around 2 per cent in nominal terms, it will not be long before real income growth hits zero, hurting consumption.
“Against the forces of sterling depreciation, a Brexit-related slowdown in activity and consumer demand should provide some offset, keeping inflation in check as we move into next year. But these are unlikely to be sufficient to completely counteract the impact from higher import prices."
As the Bank of England’s approach to handling inflation is reducing the base rate, Helal Miah, investment research analyst at The Share Centre, said it is clear investors must get used to interest rates staying lower for longer.
However he said while there will be mixed takeaways for sterling’s fall for different UK listed companies, overall the picture for UK equity investors looks good as exports continue to thrive.
Mr Miah said: “We therefore believe that the stock market still remains the most attractive asset class from an income and growth perspective.”
Adrian Lowcock, investment director of Architas, said UK investors should remain focused on growing their assets above the rate of inflation.
He said: “As such cash and indeed many government bonds are no longer offering savers and investors a real return after inflation.
“There are still plenty of options with many equities yielding 3 or 4 per cent, while commercial property and infrastructure also offer attractive yields albeit with varying risks attached.”
However Russ Mould, investment director at AJ Bell, said a lot depends on how the Bank of England reacted to developments.
He said: “The yield on the 10-year Gilt is already back above 1 per cent, way higher than its summer lows near 0.5%, and this could start to affect interest rates on debt across the board, from mortgages to corporate bonds, making borrowing more expensive, whether the Bank of England likes it or not.
“From an investment perspective, history shows that a bit of inflation is not a bad thing for stock markets and certainly better than deflation or stagflation.
“However, if too much inflation causes the Bank of England to raise interest rates or drives government bond yields higher then investors could be lured away from stocks and back toward cash or bonds, removing some of the support given to share prices by the premium yield that is currently available from equities.”
