Inflation could soar in 2017 - Kames

Added 25th October 2016

United Kingdom investors must prepare for much higher inflation next year as the pound’s sharp decline impacts the cost for consumers of everything from well-known household brands to petrol prices, according to Kames Capital’s James Lynch.

Inflation could soar in 2017 - Kames

Lynch cites the spat between Tesco and Unilever after the former baulked at price hikes on products including Marmite and Ben & Jerry’s as a reason to be concerned.

While the dispute over Unilever’s attempts to push higher import costs onto buyers was settled, Lynch, co-manager of the Kames Absolute Return Bond Constrained Fund said this was a sign of things to come, with inflation likely to climb much higher as the effects of sterling’s slump feed through.

“The headlines we have recently seen from the Tesco / Unilever scuffle are obviously discussions that happen behind closed doors but we don’t normally get to hear about them,” he said. “However, that story brought into sharp focus the impact a falling pound will have, and it is evident that we should be expecting prices to rise through 2017. Estimates vary as to the sensitivity of exchange rates into domestic price moves, but the arguments are about by how much, and not if, prices will rise,” Lynch added.

Lynch noted that the Bank of England ‘appears sanguine’ on the inflationary impact of sterling’s recent falls, expecting much of it to be transitory, and has therefore kept monetary policy loose.

“A key metric for the Bank before the Brexit vote was labour costs, and they have been steadily rising since 2014,” he continued. “If the labour market can remain tight with decent growth, employees may react to higher prices by asking for higher wages, and this domestic inflation could drive CPI significantly higher if it is sustained.”

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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