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

Javier Stokes
February 14, 2018

Inflation is now the enemy of stock investors. Stock market futures dipped immediately after the BLS report was released at 8:30 am. EST.

Food prices rose by 4pc, the slowest pace in four months, as inflation dipped sharply across staples including rice, pasta, meat and dairy produce.

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.

The single biggest contributor to the unexpectedly high increase in the Core CPI (0.3% vs.an expected 0.2%) was a big jump in the price of apparel.

The Labor Department's consumer-price index, a measure of what Americans pay for everything from theater tickets to breakfast cereal, rose 0.5% in January after rising a seasonally adjusted 0.2% in December, while so-called core prices - which exclude the volatile food and energy categories - rose 0.3% following a 0.2% gain the month prior.

The yields on the benchmark US 10-year Treasury bonds rose to 2.8730 percent after falling to 2.8222 percent earlier.

Finance Minister Arun Jaitley, in his budget speech, announced a slew of rural and healthcare policies that are likely to increase inflationary pressure, thereby making it hard for the RBI to tinker with the interest rates.

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The CPI data "didn't necessarily disappoint for those believing in a real strong return of inflation story", said Craig Bishop, vice president of US fixed income at RBC Wealth Management. It grew 8.4 per cent in December a year ago compared with just 0.6 per cent in December 2016. That broke a three-month string of flat or negative non-seasonally adjusted inflation.

The IIP had grown at 2.4 per cent in December 2016. Here are the new March 2018 inflation indexes for all TIPS.

On a month-on-month basis, the food sub-index was about 0.87 per cent in January 2018, down by 0.29 per cent from 0.58 per cent recorded in December.

Both Gertjan Vlieghe and Ian McCafferty, external members of the Bank of England Monetary Policy Committee expressed that optimism in comments made yesterday. Resistance remains back at the recent highs earlier this month just above the 1.2500 area. Lots to think about.

Investors sold USA government bonds Wednesday, sending yields jumping, after closely watched data showed inflation firming more than expected in January.

If the market believed that the CPI surprise represented a trend rather than a blip, it would bid up real yields, expecting the Federal Reserve to raise interest rates in the future (expectations about the future federal funds rate are the big near-term determinant of real yields).

We've seen head-fakes before on USA inflation, but most of the recent periods of increases have been energy related, such as in the months late last summer after hurricanes struck Texas and Florida.

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