Conflicting forces will keep UK inflation above its official target throughout 2018, according to Kames Capital’s Juan Valenzuela, with the official number likely to edge down slowly rather than fall sharply.

Consumer Prices Index (CPI) inflation dipped to 3% in December, with markets seeing the drop as the start of a sustained downturn for prices.

Valenzuela, co-manager of the £298m* Kames Strategic Bond fund, says while the official figure will fall from current levels, it will remain significantly above the Bank’s 2% target throughout the year.

“We saw the peak in inflation late last year at 3.1%, much of which was driven by the impact of sterling depreciation, but that will come off rapidly in the coming quarters,” Valenzuela says.

“Other factors which drove it up – such as higher car insurance premiums and energy price increases – also won’t be repeated this year.”

However, balanced against this downward pressure is the impact of Brexit on the outlook for UK jobs figures. Valenzuela notes unemployment in the UK has fallen consistently since mid-2016 and now stands at just 4.2%, its lowest level since 1975[1].

“Brexit and the migration issues it is causing means unemployment has fallen to such an extent that we are now seeing some job shortages in the UK,” he says.

“That may lead to some wage inflation, and for that reason we don’t expect the official figure to slide to the Bank’s target this year.”

Instead, Kames says it could trade in a range between 2.6% and 2.8% in 2018. “We could see it around the 2.6% mark this year, but the outlook would have to change significantly for it to go much lower.”

[1] According to data from the Office for National Statistics, for the period Sept-Nov, UK unemployment (aged 16 and over, seasonally adjusted) was 4.3%, the lowest rate since Apr-June 1975.

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