This would finally mean an end to the erosion of purchasing power of wages.
“For the first time in half a decade we will no longer be getting progressively poorer as each month rolls round,” said Tom Stevenson, investment director at Fidelity in his daily investment insight note.
“This week’s numbers will be good news on two fronts. First, they suggest that interest rates can remain at rock bottom until sometime next year because inflation is safely below the Bank of England’s (BoE) 2% target. It also means that consumer confidence should perk up.”
What this means for investors is that a swing back to FTSE 100 stocks might be a way off just yet, in Stevenson’s view.
“The first point to note is that the UK economy is not the same thing as the UK stock market. Many of the biggest quoted companies in London are bellwethers for the global not the UK economic cycle. If the UK economy continues to fire on all cylinders, the small and mid-cap stocks may continue to have the edge despite their higher valuations than the blue-chips.”
“I suspect the best approach as ever is to maintain a decent balance in your portfolio between small and mid-caps that will benefit from further good news at home and some of the larger companies that will gain from the ongoing recovery in the US, Europe and some emerging markets,” Stevenson concluded.
Richard Philbin, chief investment officer at Harwood Multi-Manager, said the macro environment is always factored into his asset allocation decisions.
“In a rising interest rate environment everything is driven by fear of inflation. You need to look at safer places to be in terms of purchasing power.”
In an environment where wage inflation could be starting to creep up, Philbin suggests investors should look at higher beta products and sector theme funds, both of which can benefit from increased consumer confidence.
“But you have to be careful by playing the consumer theme you’re not concentrating risk too much. You’ve got to diversify across themes too.”
Alex Hoctor Duncan, head of EMEA retail at BlackRock, said the fact the UK inflation rate is at its lowest level for four years is a mixed blessing for investors.
“Our research found that two in five Britons consider the effects of inflation when making decisions about their savings and investments. However, the rate of inflation looks set to remain above the prevailing interest rate for some time yet so the purchasing power of their cash savings is being eaten away.”
“A cash pile of £1000 five years ago would only be able to buy you £860 of goods today,” said Hoctor Duncan.
“Savers need to consider outcome orientated investments which have the potential for higher returns and income over the longer term.”
