This week saw the release of inflation data for the month of January. In the US, inflation came in at 6.4% on an annual basis, slightly ahead of the forecast but still registering a seventh consecutive monthly decline. In the UK, the trend was similar, albeit at higher levels as annualised inflation was recorded at 10.1% in January, having fallen from 10.5% in December. The largest contributor towards the fall in the UK was lower fuel costs, but with food prices rising at an eyewatering 16.7%, this will come as little comfort to the public experiencing a cost-of-living crisis.
The fall to 10.1% was greater than analysts had predicted, and this may encourage members of the Bank of England monetary policy to feel that interest rates are perhaps now high enough at 4% to bring inflation down towards the 2% target. It is interesting to note that there are now five-year fixed-rate mortgage deals (3.99%) available below the current base interest rate, which indicates that interest rates are expected to head lower in the period ahead. The decrease also illustrates that some of the self-inflected damage caused by Kwasi’s mini-budget has now been repaired. In the weeks that followed the budget, interest rates of 6-7% on a five-year term were typical.
Both inflation figures continue to paint the narrative that peak inflation has passed. Further falls can be expected in the months ahead, as the spike in energy prices seen last year following the invasion of Ukraine washes out of the data.
Markets have rallied strongly from their lows in October. If you could have started the year with a wish list of positive economic catalysts, it feels like a few items have been ticked off earlier than many would have expected. Inflation has trended lower than predicted, economic growth, together with corporate earnings have so far proved resilient, and a kicker of China reversing its zero-Covid policy has certainly helped boost market sentiment. This increased optimism was reflected in the FTSE 100 hitting the 8,000 level for the first time this week. Founded in January 1984, the index began at the base level of 1,000.
John Naylor, Chartered FCSI – Head of Investment Committee