Please note that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
On Wednesday 16th August, the Bank of England announced that UK Inflation had fallen to its lowest level in 18 months.
Relevant data:
- Lower energy prices drove the sharp drop in July to 6.8% from 7.9% in June.
- Food and non-alcoholic beverages prices also dropped, with the growth of circa 15% versus 17% in June.
This news is broadly in line with expectations and there was little market reaction to the news. However, prices across the board are still up significantly on last year, and falling inflation is clearly not the same as falling prices.
Underlying pressures persist with core inflation, which strips out food and energy prices, remaining the same from June at 6.9%. Stubborn core inflation is largely due to the rising prices of services, which were 7.4% in July compared to 7.2% in June.
The latest data for wages in the UK shows that annual growth in total pay (including bonuses) was 8.2% in the three months to June, which was up from 7.2% in the three months to May.
Food price inflation whilst falling, remains high.
What impact could the drop in inflation have on interest rates and investment portfolios?
Interest rates
The Bank of England will take these factors into account, including the state of the housing market, when judging the outlook for interest rates.
The larger-than-expected figure for wages coupled with the current levels of inflation means that the current market prediction is that interest rates will rise by 0.25% in September. Furthermore, peak rates may now be around 6% to 6.5% in early 2024, rather than the expected 5.75%.
Investment portfolios
Persistent inflation, food and energy crises, and war have, in general, had a negative effect on investment portfolios over the last two years. However, not all investments are negatively impacted by high inflation. The stocks of companies that have pricing power, as well as those with strong balance sheets and the ability to continue paying good dividends to investors, will perform better during periods of high inflation.
As interest rates peak and inflation fall, this could also offer opportunities in the fixed-interest sector. Equity valuations have also improved, and the growth potential of stock markets means that diversified investment portfolios can still achieve returns ahead of inflation over the medium to longer term.
How can we help?
Phil Terry is a Partner and Independent Financial Adviser at Nelsons, specialising in investment advice for individuals, trustees, deputies, and attorneys.
For further advice on the subjects discussed in this article, please get in touch with Phill or another member of our Investment Management team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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