Welcome to your April monthly market outlook from atomos
Inflation is expected to fall back to the Bank of England’s 2% target in as little as a month after peaking above 11% less than two years ago. Does this mean the end is in sight for the cost-of-living pressures that have squeezed many UK households since 2021?
UK inflation fell to 3.4% in the year to February, down from 4% the previous month, driven by slowing food price rises.
However, it’s important to note that the latest inflation figure is not showing prices falling. It is showing the rate of price increases slowing. To put it another way, the cost of everyday goods and services is still rising, albeit at a gentler pace.
Contributions to CPI Inflation
Sources: Bloomberg Finance L.P., Department for Energy Security and Net Zero, ONS and Bank calculations.
(a) Figures in parentheses are CPI basket weights in 2023. Data to December 2023. Component-level Bank staff projections from January 2024 to June 2024. Diamonds indicate projections for headline inflation in 2024 Q3 and Q4. The food component is defined as food and non-alcoholic beverages (FNAB). Fuels and lubricants estimates use Department for Energy Security and Net Zero petrol price data for January 2024 and then are based on the sterling oil futures curve.
The Bank of England forecasts – as do we – that inflation will fall to close to its 2% target in the second quarter of this year, perhaps even as soon as April, helped by lower energy and agricultural prices. The high cost of food and fuel is not the only stress factor UK households have had to contend with. The average cost of renting increased 9% in the year to February, marking the highest annual increase since records began in 2015. Owner-occupiers housing costs – a measure of the costs associated with owning, maintaining and living in one's own home – also rose 6% in February.
Inflation-beating wage growth
The other aspect to the problem is that wage growth in the UK has been stagnant. For cost-of-living pressures to ease, at least for the average worker, total pay will need to start increasing more than inflation. The good news is that labour market is starting to finally return to normality. As inflation has fallen over the past few months, we are now starting to see earnings growth outstrip inflation. For example, in October to December 2023, total pay rose by 1.6% more than CPI inflation, compared to a year earlier.
Whether people individually start to feel better off is very dependent not only on their income growth relative to the overall inflation rate but also the type of goods and services that they actually spend their money on. For instance:
-
Price inflation in food and non-alcoholic beverages is falling quickly – it was 6.9% in January, compared to one year ago, and 5% in February. This is still well above the current overall rate of CPI Inflation of 3.4%.
-
Alcohol and tobacco inflation in February was still very high at 11.9%.
-
Restaurant and hotel inflation was 6% in February.
Interest rate cuts expected this year
Falling inflation means that UK interest rates are very likely to be cut in 2024, bringing cheer to borrowers, if not savers. Bond markets are currently pricing in two reductions to the Bank of England official rate by the end of 2024, which would take it from the current 5.25% to 4.5%. This could mean cheaper mortgage deals and lower interest rates on borrowing such as loans, and lower interest rates on savings accounts. We think two rate cuts are likely this year, starting in the summer. This gradual lowering of interest rates should also start to support the economy and economic growth from 2025, helping lift the UK out of technical recession.
Sector in focus: Consumer staples
Consumer staples are the essential products we all buy and use day-to-day, including things food and beverages, household goods, and hygiene products.
Some of the world’s largest consumer staples companies include Nestlé, Unilever, Coca-Cola Co, Mondelez and Diageo. These are the companies that make the branded products you can find in fridges, pantries and bathroom cabinets across the globe.
As in 2023, the consumer staples sector has underperformed global equities so far this year, although it has still delivered a good return of 3.4% year-to-date.
Consumer staples is a defensive sector, typically outperforming in declining economic environments or when investors are worried about risk. Like other defensive sectors, consumer staples has underperformed technology-related stocks over the last year.
Some consumer goods companies have been able to pass on the higher cost of raw materials to shoppers who have been happy to stick with premium brands they know and love. Other firms have seen their customers ‘trade down’ from brand names to cheaper alternatives to save money, reducing sales volumes.
Looking forwards, the 2024 outlook appears to be brighter, as easing pricing pressures could boost retail volume growth. Longer term, there could be weather-related risks, for example with the El Niño climate pattern threatening emerging economy food producers. This could increase prices of agricultural products, such as rice in Asian markets.
Changes to our investment thinking
We are currently reviewing the mix of global equities and UK equities in some portfolios and are considering slightly increasing our exposure to the UK.
This could reduce relative risk in portfolios and allow us to take profits (this means selling an investment to lock in the gains made) on some of the global positions we hold which performed well last year, and reinvest those gains. It would also bring us more into line with the typical positioning among other wealth managers which tend to hold more in the UK market.
For strategies with fixed interest exposure, we are also assessing the relative benefits of holding more equities versus more corporate bonds based on a more optimistic outlook for equity earnings and limited potential gains from corporate bonds.
If you would like to discuss any of the topics covered in this month’s outlook, our door is always open. Contact us
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.