It’s been a while since we looked at inflation numbers and interest rates, but they remain an important factor for both investor sentiment and market performance. The aim of the major Central Banks has been to orchestrate a ‘soft landing’ for each of their economies by driving down inflation without entering a significant period of recession. In the UK, the price we are seemingly paying for our efforts to lower inflation is an economy going nowhere quickly, with the International Monetary Fund forecasting that the UK economy will grow by only 0.5% this year and risks being trapped in a prolonged period of weak growth and stubborn inflation.
The latter remained in focus last week, and data suggests that there may yet be further to go before the Bank of England will feel comfortable enough to start cutting rates. Whilst UK inflation eased to 3.2% from 3.4% it remained ahead of the consensus. Service sector inflation, which is seen as a good measure of domestically generated inflation, stood at nearly 6%, driven higher by rising insurance premiums, restaurant prices and accommodation costs. It is a similar picture in the US where inflation levels rose in March, and it looks like rate cuts there remain even further away than in the UK.
One thing that could further derail the outlook is the price of energy, with oil up by over 15% since the middle of December on the back of ongoing geopolitical concerns, extended supply cuts and what appears to be quite resilient levels of demand. There is little doubt that falling energy prices have done a lot of the heavy lifting in terms of bringing headline inflation levels down, so the impact of any further upwards movement over the coming months is something that investors will need to keep under review.
