Inflation at highest rate in 2.5 years

Rising air fares and food prices have helped to push the UK inflation rate to its highest level since July 2014, according to the office of National Statistics today. CPI rose to 1.6% in November 2016, as the impact of the falling pound started to feed through to the UK economy.

Although still below the Bank of England’s 2% target, it suggests that inflation is finally starting to make a come back.

FundCalibre managing director, Darius McDermott, spoke about rising rates and inflation in his outlook for 2017 blog last week. This week, Mark Martin, manager of Elite Rated Neptune UK Mid Cap fund, has also given his views on the year ahead.

We’re yet to feel the full impact

“A by-product of post-referendum sterling weakness is inflation, and we expect this to continue to gather steam over the coming months, with energy and food prices the hardest hit. The full impact of this weakness is yet to impact the prices paid by consumers due to the hedging arrangements that many importing companies have in place; these result in a lag between the pound weakening and its effects being felt in the wider economy.

“As the complexities of the negotiations between the UK and the European Union unfold, we expect the ensuing uncertainty to continue to put pressure on the pound relative to other major currencies. This should act to stimulate exports, as UK goods and services become more competitive overseas; as a result the Neptune UK Mid Cap fund is focused on those companies that we deem to be winners as a result of weaker sterling.

Overseas buyers of British businesses

“The weak pound should also act to stimulate further M&A [merger and acquisition] activity as overseas buyers see a reduction in the foreign currency price of UK assets. We have already seen signs of this starting to play out with the Japanese takeover of ARM, as well as overseas approaches for Poundland, Premier Farnell and Brammer further down the market cap spectrum in the post-Brexit period.

“If the rate of inflation rises above target, it may necessitate the Bank of England raising interest rates, which would undoubtedly be negative for the UK consumer. We are avoiding domestic cyclicals, which are valued relatively highly given this uncertain backdrop. Instead we are focusing on overseas earners and those domestically-focused companies that are exposed to non-discretionary spending.”

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.