The return of inflation has been one of the dominant themes since the start of the year. Economic data in Europe and the US have both surprised on the upside while in the UK fears of deflation, which were so much a part of 2016, now seem a long-distant memory.
This is borne out by the latest figures from the Office for National Statistics whose Consumer Prices Index (CPI) jumped to 2.3% in February, up from 1.8% in January. This breaches the Bank of England’s 2.0% target and the bank itself has said it expects inflation to peak at 2.8% next year.
Two things are at play here: first, sterling’s weakness since the Brexit decision has increased the cost of imports; second, the increase in commodity prices, particularly oil, has had a knock-on effect through the rest of the economy.
Meanwhile, even as inflation begins to rise, UK interest rates remain at an all-time low of just 0.25%.
As inflation rises, we believe the Bank of England will consider tightening monetary policy, which in turn would increase pressure on bond pricing, particularly towards the long end of the maturity spectrum. Now more than ever we think it makes sense for investors to consider inflation protection strategies for their portfolios to preserve the value of future cash flows.
David Hooker – Insight, a BNY Mellon company