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Core Inflation Increases

19 Feb 2018

Jack Turner, Research Analyst

This week we provide an update on UK inflation, discuss how the weaker US Dollar is impacting portfolios, as well as highlighting three key pieces of economic news from the UK, EU and US.

The release of UK inflation figures surprised many economists since many were predicting that the rate would start to drop as the effects of the devaluation of Sterling fell out of year-on-year calculations. However, the latest data showed that while the headline Consumer Price Index remained unchanged at 3%, instead of dropping to 2.9% in line with expectations, and the core inflation number rose to 2.7% suggesting that inflation could be around for longer.


NEWS

UK UPDATE
UK retail sales rose by just 0.1% month-on-month in January, as sales of gym wear improved while food sales fell. The Office for National Statistics meanwhile puts their year-on-year growth at 1.6%. The month-on-month figure was much lower than the 0.5% expected and meant that sales failed to recover from December’s drop of 1.5%. However, others were quick to state that the 0.5% expected was significantly ahead of trend and had always been unlikely given the rate of inflation versus the sluggish growth in wage packets.

EU UPDATE
The Eurozone’s economic activity expanded by 2.5% in 2017, its strongest performance since 2007’s 3.0% growth. Over Q4 2017, the region’s collective economy grew by 0.6%. German GDP grew by 0.6% in the final quarter of 2017, with growth driven primarily by strong exports, according to Destatis, and while government spending rose, and household consumption was essentially flat. Elsewhere, France also expanded by 0.6%, while Spain’s GDP was slightly stronger at 0.7%.The number also marked the first time that Eurozone growth was faster than that of the UK since 2010.

US UPDATE
US inflation was higher than expected for the second month in a row. Consumer prices rose 0.5% in January although the main reason was an increase in medical supply prices rather than being wage-led. While the year-on-year rate held steady at 2.1%, the increase was greater than had been expected. Core consumer prices, which exclude food and energy, rose 0.3% over the month, with the year-on-year rate remaining at 1.8%. But while the publication of figures linked to inflation spooked markets two weeks ago, equity markets rose on the back of the latest news, although the selling in the bond market intensified.


PORTFOLIO ACTIONS
The weaker US Dollar supported the performance of 7IM portfolios given we hold fewer Dollars versus our neutral Strategic Asset Allocation benchmark. It’s a position that was beneficial for 7IM throughout 2017 as action by Donald Trump disappointed and global growth attracted flows to non Dollar assets. The currency was damaged further at the start of 2018 in a speech by Steve Mnuchin, the US Treasury Secretary, who reversed almost two decades of Dollar policy when he indicated that the weaker currency was favoured given the boost it would give US exporters. The team are, meanwhile, also watching out for inflation after a strong US CPI report last Wednesday. Risks due to inflation are increasing given the weak Dollar, rising oil prices and tax reform -all possible drivers for the financial markets in the year ahead.


THREE ANNOUNCEMENTS DUE THIS WEEK
21 Feb –UK Unemployment Rate (Dec) // 21 Jan –US Existing Home Sales (Jan) // 23 Feb –EU Inflation Rate (Jan)

SOURCES: BLOOMBERG; ONS, REUTERS; 7IM.

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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