While the Consumer Prices Index has fallen from 1.8% in April to 1.5% in May, some are writing this off as the effects of “price war” among the big supermarket chains with food prices falling sharply.
However, with one of those supermarkets Morrisons having announced its intention to cut jobs yesterday, it can be suggested that the real crux of the debate is around unemployment figures and wage inflation.
For Nick Gartside, CIO of JP Morgan’s global fixed Income, currency & commodities (GFICC) group, wage inflation is the “desert island” indicator – the one piece of economic information you would want if you were stranded from news on the UK economy.
Expectations build
He explains: “In the UK, services make up roughly two-thirds of GDP, thus when wages start to rise, so wage expectations build, people begin to spend the marginal pound, inflation kicks in and thus wage demands rise and the cycle starts again.”
With this cycle in mind, Gartside says he is seeing a trend away from benchmark-constrained fixed income instruments as investors continue to fret about rates.
“They are moving toward those funds with an unconstrained approach – if we are approaching a rise in rates you want to be less dependent on any one country,” he adds.
Looking at the broader picture, inflation on both sides of the Atlantic is in a cyclical trough, an inflection point which will see the Core Consumer Price Index actually move higher in coming months, believes Gautam Batra, Investment Strategist at Signia Wealth.
“Central banks on both sides of the pond will be under more and more pressure to tighten monetary policy, and will need to tread carefully to not destabilise the nascent promise of economic recovery,” he says.
“Driving this inflationary pressure is a spate of promising economic data, together with rising wages, buoyant consumer confidence and strong balance sheets, which together will allow companies to pass price increases on to consumers without too much hesitation. The real test now to economic recovery looms on the horizon, as corporations begin to show their hand and react to these changing tides of monetary policy.”
What's the peak?
While speculation about the timings of a rate rise is understandably at the forefront of investors’ thoughts, the real question is not when the Bank of England will act but how high will rates go, says Jenna Barnard, deputy head of fixed income at Henderson Global Investors.
“If rates peak at 5% to 6% then that will be major trouble for bond markets,” she adds.
“But with UK growth data looking strong and inflation low, there is less pressure for the Bank of England to move any faster for the time being.”
