10 investment professionals react as inflation hits 3%

With inflation hitting its highest level in five years, we collate the views of some top investment professionals.

Inflation hits 3%

UK inflation has hit 3%, its highest level in five years.

Increasing inflation poses a range of dilemmas for investors and savers. We collate some of the top views to the jump in the cost of living.

Inflation hits 3%

UK inflation has hit 3%, its highest level in five years.

Increasing inflation poses a range of dilemmas for investors and savers. We collate some of the top views to the jump in the cost of living.

Jason Hollands, managing director Tilney

'With inflation continuing to run ahead of wage growth, the squeeze on consumer spending power looks set to remain a headwind for the economy in the near term, though a tightening labour market should feed through to higher wages.

'With inflation outpacing wage growth, this should add to the pressure on the embattled chancellor to relax public sector wage constraints as he prepares for next month's Budget.'

Robert Szechenyi, investment director at Rathbones

'It is unsurprising that almost half of the UK savers we surveyed cited inflation as being the biggest threat to their wealth.

'And with over a quarter of savers surveyed already reporting a negative effect from the rise, action needs to be taken by savers and investors to combat the effects of rising inflation.

'Investing in the stock market, property or other alternative asset classes can be effective ways for investors to ensure their savings weather the storm of both a growing rate of inflation and political and economic uncertainty in the UK.'

Nick Dixon, investment director, Aegon

'The Bank of England has hinted at an increase in interest rates in the coming months, sentiment likely to gain traction following today's announcement that inflation has reached 3%.

'While there are signs of a slowing economy, with sterling still at risk as Brexit negotiations remain inconclusive the British economy remains vulnerable to further inflationary forces.

'These pressures could become embedded through increasing demand for higher pay - especially in the public sector - without the political will for matching tax increases.

'Looser government spending will force monetary policy to take the strain, meaning higher interest rates which we believe are not currently reflected in market expectations.'

Paul Mumford of Cavendish Asset Management

'It's not a surprise that inflation has ticked up to 3% today. There are a number of incoming factors that are putting upward pressure on inflation - the living wage and higher import costs as a result of sterling's fall to name a few.

'It is difficult to see what the counter-force will be to keep inflation at the current level.

'That said, higher inflation will be a positive for some companies such as supermarkets, reducing the pressure on their margins and abating the intensity of their price wars.

'Meanwhile low interest rates will continue to support companies with debt, while those companies with lots of cash will be in a good position to make acquisitions or return money to shareholders.'

Matthew Brittain, investment analyst at Sanlam UK

'While far from being a watershed moment, today's announcement that the rate of inflation has reached the 3% point does pile more pressure on already squeezed living standards.

'Our view is that current levels of inflation are nothing to worry about - it's simply a case of businesses passing on higher import costs, brought about by a fall in sterling, to their customers.

'Over the coming months, our expectation is that it will start to fall back to 2%, the level at which the Bank of England is mandated to maintain it.

'This view is not necessarily shared by the Bank of England, and today's announcement makes an interest rate rise in November a near certainty as the Monetary Policy Committee takes action show they are keeping inflation under control.'

Ian Kernohan, economist at Royal London Asset Management

'CPI inflation rose to 3% in September, on the cusp of letter writing territory.

'While this is higher than expected in the August Inflation Report, the Bank of England's MPC did signal in the last set of minutes that CPI would rise to 3% by October, so this won't have come as a surprise to them.

'We expect the Monetary Policy Committee (MPC) to raise interest rates at the next meeting in November; Inflation should fall back next year, as the effect of sterling devaluation begins to ease.'

Leila Butt, senior economist at Prudential Portfolio Management Group

'The continued rise in inflation makes it more likely that the Bank of England will hike rates by 25bps at its November meeting, despite the fact that forward looking indicators are signalling a further slowdown in economic growth.

'But any rate hikes in the short term will probably be limited in scope. Our view would change regarding a November hike if forward looking indicators (survey and official data) weaken further in the run-up to the November meeting, or political risks, particularly around Brexit, rise.'

Shilen Shah, bond strategist at Investec Wealth & Investment

'The September inflation prints, whilst coming in at consensus, confirms that that the lagging effect of a weaker currency has pushed headline CPI to 3%. The base effect however means that we are probably nearing the peak in the year-on-year print.

'The underlying data indicates that food and transport costs were positive inflationary factors, whilst a lower rate of growth of clothing prices compared to a year ago supressed the broad index.

'A key concern for the Bank of England however remains that core inflation remains at multi-year high of 2.7%, highlighting potential capacity constraints over the medium term.'

Tom McPhail, head of policy Hargreaves Lansdown

'Inflation can often be bad news for pensioners and pension savers as it can erode their savings, but today's CPI number will produce a relatively generous increase to both private pension savings and to the state pension. Our only hope now is that the chancellor doesn't look on this as an excuse to raid pensions taxation again in next month's budget.

'Public sector pensions increase member entitlements for next year using the September inflation rate.

'This is a particularly thorny topic at present given the pressure on government around public sector pay which has stagnated.

'Since 2015 Public Sector Pensions have moved to using Career Average Earnings as opposed to final salary pensions. This basically means that each year members 'bank' their accrued pension and this is uprated in-line with the previous September's inflation.

'So with inflation of 3% in September 2017, the increase for pensions being accrued will be 4.6% on the Teachers’ Pension, 4.5% for those in the NHS and 4.25% for the Police Pension Scheme.'

p>Viktor Nossek, director of research at WisdomTree in Europe

'There has been much talk of a rate hike later this year by the Bank of England, but with so many areas of weakness in the economy, and high levels of indebtedness, a rate rise could be a step too far for the Bank of England, at least until there is more clarity on Brexit.

'The deciding factor could be the pound, but even here the outlook has become more benign, with the currency appreciating substantially off lows and acting as a dampener on inflation.

'While an eye-catching number, the real question is if beyond the peak, inflation will trend lower and be contained enough to sustain consumer spending. Against poor productivity, wages are expected to struggle to even keep up with lower inflation further out.'

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