CPI inflation fell to 0.5 percent in December, ONS figures revealed today, down from 1 percent in November. The drop was largely attributed to the fall in motoring costs and food prices, as the falling oil price and the supermarket price war continue to impact the UK economy.
Here we provide some comments for investors, and a threat and an opportunity emerging from the factors behind today’s inflation figures. Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘Investors shouldn’t rush to adjust the shape of their portfolios purely on the basis of today’s inflation figures. The factors pushing down inflation are likely to gradually fall out of the equation, and may even be inflationary in the medium term as more money makes its way into the pockets of consumers.
Cash savers may not be so sanguine however as these inflation figures basically kick interest rate rises into the long grass. Those patiently waiting for deposit rates to rise may well take matters into their own hands by moving up the risk spectrum. If you do believe the UK is heading for a prolonged period of very low inflation, or even deflation, then you are in tune with what the bond market is saying. The 10 year gilt yield currently stands at 1.5 percent, which implies we are heading for Japanese-style economic stagnation for the next decade. However Bank of England intervention in the form of QE raises a big question mark over how rational we should judge the gilt market to be.’
A threat and an opportunity
Threat: low interest on cash.Cash deposit rates are surely going to stay lower for longer as a result of falling inflation. The Governor of the Bank of England is highly unlikely to raise rates while at the same time writing a letter to the Chancellor to explain why inflation is so far below target.
Short term savers have little choice but to grin and bear it. Where possible they should consider using their Cash ISA allowance to ensure what interest they do get is not eroded by tax. Overs 65s should consider the new ‘pensioner bonds’ from NS&I which are offering market-beating fixed term rates (2.8 percent for 1 year and 4 percent per annum for 3 years), though these are taxable rates.
Those sitting on cash for the longer term might consider taking on more risk in search of higher returns by investing in the stock market, though they must acknowledge this puts their capital at risk before doing so.
This is a trend we have seen taking shape in recent years as longer term cash savers have got fed up waiting for rates to rise, and have transferred their cash ISAs to stocks and shares ISAs. This trend has been exacerbated by falling cash rates, and the recently introduced freedom allowing savers to convert stocks and shares ISAs back to cash again if they want to. We saw 36 percent more transfers into our stocks and shares from cash ISAs in 2014 than we did in 2013.
Opportunity: supermarkets and oil companies.Supermarkets and oil companies are some of the most unloved companies around at the moment as a result of the falling oil price and the supermarket price war.
Here at some of the big price movements in these sectors over the last year:
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Contrarian investors with strong stomachs might put these sectors on their watch list, though with the oil price falling and no sign of pressure relenting on the supermarkets, it is impossible to time the point of entry with any attempt at precision. Anyone investing in these sectors should therefore be willing to take a long term view, and to see the stock price get worse before it gets better.
