UK Inflation comment
City Index October 18, 2016 3:49 PM
<p>The UK September inflation figures were slightly stronger than expected, with the annual headline rate rising to its highest level since November 2014. The core […]</p>
The UK September inflation figures were slightly stronger than expected, with the annual headline rate rising to its highest level since November 2014. The core rate rose to 1.5%, in line with expectations and the highest level since March this year. The main contributors to rising prices in the UK were clothing, overnight hotel stays and motor fuels. All of this can be traced back to the fall in the pound: oil imports are getting more expensive, clothing imports are also costing more, and the weak pound is boosting the tourism industry, which appears to already be fuelling a rise in hotel prices.
Interestingly, there was a fall in air fares and food prices. This is also worth noting as it suggest that the airlines, who are also struggling with terrorism and higher costs due to the falling pound, may be absorbing these with higher costs rather than passing them onto the UK consumer, to entice them to travel abroad even with an unfavourable exchange rate. Likewise, as we saw last week with Marmitegate, supermarkets also seem unwilling to pass on rising prices based on the falling pound to their customers, which led to an almighty spat between Tesco and one of its main suppliers Unilever.
So far, the fall in food prices has not been reflected in the share prices of the major supermarkets. Tesco’s share price has actually risen close to a 12 month high since last week’s spat with Unilever, it appears that keeping prices low and maintaining market share is more important than a squeeze on profit margins, at this stage. However, this could change if we continue to see prices rise for at least the next 6-12 months, as we expect.
The pound’s reaction to the CPI data has been a continuation of the recovery that we saw during the Asian session. GBP/USD has attempted to break above the 1.2280 level, but has been rebuffed again. We expect GBP/USD to continue to try and breach this level for as long as the dollar remains under pressure.
Interestingly, the inverse correlation between the GBP and the FTSE 100 appears to have broken down, with the pound and FTSE 100 both rising today. We think that the FTSE 100, along with the other major European indices, have benefited from central bank talk of late from both sides of the Atlantic, which suggest that both the Fed and the BOE will look through a period of rising inflation to help benefit growth, which is favourable for share prices.