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Your Thoughts: 5 Year Inflation High

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According to the Consumer Prices Index (CPI), inflation in the UK hit 3% this past September, a level not seen since April 2012, climbing from 2.9% this August.

Overall this rise in inflation means a more assured likelihood of increased interest rates, which currently sit at 0.25%. State pension payments will also rise in line with inflation figures in April 2018.

Most rumour surrounding the inflation rise speaks of the Brexit pound drop and the subsequent increase in the cost of imported goods.

Below Finance Monthly had heard from a number of reputable sources, experts and analysts in the financial sphere, with your Thoughts on the current inflation high and what it means for Britain and beyond.

Emmanuel Lumineau, CEO, BrickVest:

The UK’s relative economic strength post Brexit has now waned as consumers begin to feel the impact of rising inflation. Higher interest rates should be coming for the first time in more than a decade. For the commercial real estate industry, higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices.

We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market.

Matthew Brittain, Investment Analyst, 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. For people up and down the county, the pound in their pocket now feels a little less valuable. Inflation is now confidently outstripping wage rises, which have tended to be around 1-2%, meaning that people’s disposable income is in decline and many will have to take on more debt or save less in order to maintain their 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.

Stephen Wainwright, Partner, Poppleton & Appleby:

While the level of corporate insolvencies are at an all-time low, personal insolvencies have jumped to their highest level in almost three years. It is no coincidence that the increase comes as incomes are squeezed and failing to keep pace with inflation at 3%.

The level of annual inflation is anticipated to peak in the next three months, but while companies are trying best to absorb the increase in material costs due to the weaker pound, this can only be absorbed for a short period. Therefore don’t be surprised to see higher shop prices in the near future, which in itself will cause yet more inflationary pressures.

To compound matters, the BOE have made it clear that interest rate increases are on the radar which will impact on the £ in the pocket. We as a practice have seen a significant increase in advisory work which will inevitably lead to an increase in business failures.

The slow down is currently being concentrated in the consumer-led businesses such as retail and hospitality sectors. Recent data suggests that the construction industry has seen a downturn. The sale of motor vehicles have seen a steady decline in the last six months so clearly people are reluctant to spend on big-ticket goods.

While this sounds very negative, we must remember that the economy has been the fastest growing in the G7 for a number of years and unemployment is at its lowest since 1975. This has all happened during some of the most financially challenging times in living memory.

Has anyone tried to get a good plumber or electrician lately? Well, believe me, there is still a lot of confidence in the economy, and we are as a nation are very resilient.

Owain Walters, Founder & CEO, Frontierpay:

UK inflation figures have continued their rapid rise to 3%, coming in way above the Bank of England’s target of 2%. Sterling had a small spike against all major currencies following the inflation release, but the gains were short lived. The markets reacted accordingly to the announcement, with the pound falling throughout the day to 1.1212 and 1.3174 against the euro and US dollar, respectively.

Investors are expecting the BoE to respond by raising interest rates at its next monetary policy meeting in November, but this could be a very slow and soft approach, with rates potentially remaining at those levels for a couple of years. This has the potential to hinder any sterling strength over the coming months, with Brexit also still firmly holding the pound down.

Daniel Ball, Director at eProcurement provider, Wax Digital:

With inflation on the rise, procurement teams need to consider how to mitigate against price rises from their suppliers. Exchange rate fluctuations and rises in inflation are difficult to predict, but organisations can take steps to actively protect themselves from sudden price increases:

Be proactive

It’s important that procurement professionals, particularly those with an overseas supply chain become more proactive and disciplined when it comes to their sourcing and tendering activities. This will enable them to lock down pricing for a given period of time so that they are exempt from any cost or exchange rate fluctuations.

Collaborate with finance

Large multi-national enterprises, who do much of their buying overseas are adept at mitigating exchange rate and inflationary pressures, using complex management instruments borne from operational necessity. But if you’re a smaller organisation that only does a portion of business internationally, protecting against inflationary or exchange rate hikes won’t necessarily be a core competence.

If nothing is in place it may be time for procurement to raise the topic with the FD – most of the large banks can offer FX and inflation hedging tools. If your organisation uses these instruments already, then procurement needs to collaborate more closely with finance to discuss how to extend these current arrangements into more areas of purchasing, not just perhaps direct expenditure, but into indirect categories at risk too.

Assess risk

Supply chain evaluation needs to include risk matrices which cover not simply the core KPIs around financial stability, performance etc, but in the case of overseas suppliers then factors such as geopolitical, logistics and currency metrics too. Procurement professionals need to understand their supplier tiers, from the critical strategic ones that support production or service delivery, to the mid-tier in the larger spend categories and into the long tail invoicing infrequently. They then need to decide which parts of the supply chain will need a secondary wave of potential suppliers lined up to mitigate risk if things change significantly. This alternative supply chain may be more expensive, but will minimise the impact to business as usual if there are significant changes to the exchange rate.

John Calverley, Lecturer, London Financial Studies:

Britain’s headline inflation rate rose to 3% in September, well above the Bank of England’s 2% target. But this rise is entirely due to higher import prices caused by the devaluation in Sterling after the Brexit vote. Unless Sterling slumps again – unlikely as it is already historically low – inflation will drop back to 1.5% or below in 2019.

The conventional view is that when unemployment falls to a certain level the labour market heats up. Workers and unions are emboldened to ask for higher wages and companies become willing to offer higher wages to attract workers. For the UK (and US) that level has long been put at about 5%. In Britain unemployment has fallen from 4.9% to 4.3% since the Brexit vote which suggests wage growth should start to pick up. That is the Bank of England’s view which is why a programme of gradual interest rate rises is likely over the next year.

But some economists fear that the conventional view is wrong. Around the world wages are not responding to low unemployment the way they used to. In Japan the labour market has been tight for some time and yet wage growth is zero. In the US unemployment is also almost down to 4% yet wage growth is stuck at 2-2.5% pa, the same as in Britain. Exactly why wages are quiescent is disputed, but most put it down to the combination of weak unions, fearful workers reluctant to push for a pay rise and the competitive pressures of globalisation.

Inflation hawks fear that we have been lulled by these considerations. They worry that very soon wages and prices will start to surge, creating a serious inflation problem. The best outcome would be for a very gradual lift in wages even as unemployment falls further. After all unemployment typically stood at 2-3% in the 1950s and 60s so perhaps that is possible again today. And if wages lift only gradually this would support consumer spending while keeping the Bank of England in gradualist mode, raising rates but not too far or too fast. At the moment this seems the most likely outcome which is why, after 2017, 3% inflation may not be seen again for some years.

Katharina Utermoehl, Senior Economist for Europe, Euler Hermes:

Inflation reached three% in September, the highest rate seen in more than five years. The sharp acceleration from around one% a year ago has been largely driven by the sharp depreciation of the pound following last year’s Brexit vote which made imports more expensive. In addition, increases in food and transport prices further pushed up annual headline inflation from 2.9% in August.

For 2017, we expect UK inflation to come in at 2.7% before slowing slightly to 2.6% next year. Consumers will continue to feel the pinch with inflation easily exceeding sluggish wage growth which is close to two% and showing no sign of a pick-up.

We expect UK GDP growth to slow down to 1.4% this year and one% in 2018, down from 1.8% in 2016. The pronounced pick-up in consumer price inflation is raising the probability of the Bank of England (BoE) increasing the benchmark interest rate from the current record low of 0.25% for the first time in over a decade. The BoE has long tried to strike a balance between supporting economic activity and ensuring price stability, but with inflation now registering a full percentage point about the BoE’s two% price target the latter objective will likely take priority. We expect an interest rate hike to be announced as early as this year.

Mihir Kapadia, CEO and Founder, Sun Global Investments:

The rising inflation is largely due to the fall in value of the pound over the Brexit uncertainties. With increasingly abrasive negotiations underway in Europe, along with political cracks appearing within the British parliament, the period of uncertainty is long from over. Therefore, we can expect that the inflation figures will only be climbing northward though the foreseeable future unless and until the UK political machinery brokers a viable deal with its European counterparts and thereby douse the uncertainty which is inflaming the markets.

Meanwhile, the pick-up in inflation raises the likelihood of an increase in interest rate from the Bank of England, which is currently at 0.25%.  That being said, we would argue against a premature rate rise, considering the current political uncertainty. An interest rate rise now, which increases prices for millions of mortgage holders and could dampen economic activity, could just be the final blow to the squeezed out UK consumer.

Greg Secker, CEO, Learn to Trade:

It’s no secret that the UK’s divorce from the EU has left the economy vulnerable to more persistent price pressures, which has had a negative impact in the short term for consumers. This hike in inflation rates has tightened the squeeze on British households. The rise in the cost of everyday goods means workers are seeing the value of their pay packets weaken in real terms.

Over the next coming weeks, UK businesses will continue to take a ‘business as usual’ approach of experiencing higher costs from exports and cutting costs where possible to ease the pain of a potential decrease in business profits and power to purchase. Yet, while it may seem like doom and gloom this winter there is a light at the end of the tunnel. We expect the pound to strengthen in the long term, increasing buying power and easing those tight purse strings, but this will be dependent on the trade agreement and movements within the Brexit negotiations.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

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