UK investors must prepare for much higher levels of inflation next year as the pound’s sharp decline impacts the cost for consumers of everything from well-known household brands to petrol prices.
Earlier this month a spat between Tesco and consumer goods manufacturer Unilever went public after the supermarket giant baulked at a series of price hikes from one of its leading suppliers for products including Marmite and Ben & Jerry’s.
While the dispute over Unilever’s attempts to push higher import costs onto buyers was settled, Lynch, co-manager of the Kames Absolute Return Bond Constrained Fund said this was a sign of things to come, with inflation likely to climb much higher as the effects of sterling’s slump feed through.
The headlines we have recently seen from the Tesco / Unilever scuffle are obviously discussions that happen behind closed doors but we don’t normally get to hear about them.
However, that story brought into sharp focus the impact a falling pound will have, and it is evident that we should be expecting prices to rise through 2017.
Estimates vary as to the sensitivity of exchange rates into domestic price moves, but the arguments are about by how much, and not if, prices will rise.
So far the Bank of England appears sanguine on the inflationary impact of sliding sterling, expecting much of it to be transitory. It has therefore kept monetary policy loose in order to support economic growth as the UK embarks on the challenging process of Brexit and the period of uncertainty that entails.
However, investors nonetheless needed to keep an eye on the consumer, labour costs having moved upwards consistently for a prolonged period. “A key metric for the Bank before the Brexit vote was labour costs, and they have been steadily rising since 2014.
If the labour market can remain tight with decent growth, employees may react to higher prices by asking for higher wages, and this domestic inflation could drive CPI significantly higher if it is sustained.
James Lynch, investment manager Fixed Income at Kames Capital