Why UK inflation at 3% could be bad news for UK stocks

Ashley Carr
February 14, 2018

The UK inflation rate remained flat at 3% in January, according to the Office for National Statistics (ONS), beating analysts' expectations of a drop to 2.9%.

Wall Street is hoping consumer inflation doesn't come in high in Wednesday report, as that will set off inflation alarms and push rates up again.

Economists were pencilling in a drop to 2.9%.

Backed by lower prices of vegetables and fruits, the consumer price inflation eased to 5.07% in January from 5.21% in December, the government data showed.

"The committee is of the view that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management", the central bank said in its monetary policy statement.

"The BoE's rhetoric echoed that of September's meeting minutes, which preceded last November's rate hike, and it now looks like the next rise may well happen in May".

"Psychologically, 3% is a big number", says Ripley, adding that if inflationary pressures continue to build the Federal Reserve may have to hike short-term interest rates this year more than the three times they have signaled in a move to cool off an overheated economy.

'However, the cost of entry to attractions such as zoos and gardens fell more slowly.

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Scotland and south west England showed the highest annual house price growth, registering 7.7 per cent and 7.5 per cent respectively.

At the pumps, petrol prices rose by 1.1p per litre on the month to 121p per litre, while diesel rose 1p to 124.5p per litre. In my opinion, there's a reasonable chance the I Bond's fixed rate will rise above 0.1% on May 1.

Sterling rose 0.3 per cent against the dollar to 1.38 United States dollars following the news that the rate of Consumer Prices Index inflation held steady at 3.0 per cent in January.

The pound skidded to a three-week trough below US$1.38 on Friday after the EU's chief Brexit negotiator Michel Barnier warned a transition deal was far from assured.

Yields, which rise as bond prices fall, have shot up to multiyear highs in February - something investors have attributed to concerns that inflation could be accelerating and fears that an expanding federal budget deficit could lead to an oversupply of bonds in the market.

The futures were higher by about 0.5 percent ahead of the inflation data released at 8:30 a.m. ET. Excluding volatile food and energy prices, the index was up 0.3 percent against estimates of 0.2 percent, the Labor Department reported.

"Expectations that the Bank of England will raise interest rates in May will likely be fuelled by their regional agents reporting a pick-up in companies' expected average pay settlements", economist Howard Archer at consultants EY Item Club said.

In terms of the United Kingdom nations, average prices in England rose 5.0 per cent to a typical £244,000; Wales saw an increase of 5.4 per cent to stand at £154,000; in Northern Ireland prices grew 4.3 per cent to £130,000.

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