Market Insight - November 2016
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The Global Capital

Is a Little Bit of Inflation a Good Thing? Maybe, Maybe Not
As markets go into turmoil at each bit of Brexit news, it’s worth looking behind the volatility.

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The big news this month is the pick-up in inflation. Its only reached 1 per cent, half of the Bank of England’s target, but the market only expected 0.6 per cent and this has caused a bit of a tiz. It’s not because we weren’t expecting inflation to pick up – the drop in the currency means that it is inevitable – but because the increase in inflation “is not explicitly linked” to the fall in Sterling according to the Office for National Statistics. Rather its rise is due to the cost of clothing and fuel compared with last year when their prices were particularly low.

That doesn’t mean we should not expect price rises. Oil is priced in US$ and a 16 per cent fall in the US$/£ exchange rate means that this will flow through. And producer prices are now increasing as the effect of Sterling’s fall against major currencieshits too. That will hit all of our pockets in the coming months, especially as the cost of food and fuel , essentials we can’t avoid spending money on, rise.

But better news is that the UK’s labour market is still holding up despite the changes in sentiment across the rest of the economy. Even better news is that wage growth is still outstripping inflation which will provide some cushion to rising prices.

There is no doubt that the economy will see more inflation, but that doesn’t mean that interest rates are likely to rise quickly. The Governor of the Bank of England, Mark Carney, has been very clear that the Bank will look through higher inflation to support the economy through these uncertain times.

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