Despite the high inflationary figures we have seen worldwide in 2023, June saw a drop in inflation in the United Kingdom – a welcome relief for UK investors. But what does this change mean for the UK, and will it continue to fall?
This article will explain a bit more about how the markets are bouncing back from recent inflation changes and the effect they will have on savings rates and investors, specifically.
An overview of market movements
As shown in the Office for National Statistics graph above, UK inflation figures steadily decrease monthly, hitting a low of 7.9% in June 2023. This bigger-than-expected drop has had a knock-on effect on the FTSE 100, which is shown below:
The last two weeks for the FTSE 100 have been positive. We’ve highlighted the price on Friday, 7th July (7,256.94) compared to Tuesday 25th July’s value of 7,691.80. This is an increase of around 6%.
Why does UK inflation go up and down?
Inflation can experience shifts due to various factors:
- Economic indicators, such as changes in consumer demand, supply chain disruptions, and monetary policies by the Bank of England, significantly impact rates.
- Global events, like geopolitical tensions and commodity price fluctuations, can also influence it’s trajectory.
That’s why staying informed on these crucial drivers is important to navigate the implications of inflationary changes for businesses, consumers, and the overall economy. We also wrote about the impact of inflation on savings back in 2019.
How has inflation changed over the past year?
In the month of June, headline CPI (Consumer Prices Index) inflation in the UK fell from 8.7% in May to 7.9% in June. This was well below market expectations, although it remains significantly higher than many of the UK’s economic peers.
The significant fall will allow the Bank of England to slow down their interest rate-raising pace. For example, the BoE is now expected to choose a smaller increase at 0.25% compared to the previously forecasted 0.5%. This news is expected to delight savers and investors around the UK, especially UK expats.
Inflation predictions for the remainder of 2023
There have been a lot of predictions for UK inflation rates in 2023. Firstly, it’s important to mention that Chief UK Economist at Pantheon Macroeconomics, Samuel Tombs, predicted it might tumble further in the coming months, averaging around 7% in the third quarter of 2023. This prediction was based on the difference in food prices, which started to ease due to Russia’s invasion of Ukraine, and the recent change in the oil and gas price cap, which started to fall in July.
The Bank of England also expects inflation to ease in 2023. Their latest set of forecasts, published from May 2023, predicted a rate of 5.1% in the final quarter of 2023, a bit higher than its previous forecast of 3.9% in February.
The impact of inflation on UK share prices
UK shares remain cheap compared to their EU and US competitors. The blend of Brexit uncertainty, slower economic growth, geopolitical disruptions, sector composition, divergent monetary policies, and currency fluctuations has left investors wary of UK markets for some time, despite gains made this year.
However, Schroders argue that this could provide a long-term opportunity for the UK:
“If there is a source of short-term frustration, it is that the UK market remains ignored by investors. Even when companies do well (beating consensus estimates), their share prices are not moving significantly. 150 years of stock market history tells us that this cannot last forever and that undervaluation is the only reliable catalyst for outperformance in the long run.”
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