Why The UK’s Good Inflation News Might Be Bad News For Stocks

Why The UK’s Good Inflation News Might Be Bad News For Stocks
Paul Allison, CFA

10 months ago2 mins

What just happened?

UK inflation continued its march downward in January as overall prices rose 10.1% (5.3% on the “core” rate, which excludes more volatile food, energy, tobacco, and alcohol prices) compared to the same month last year. And let’s face it, that much-better-than-expected data is making the Bank of England’s (BoE) projection that inflation will fall sharply this year seem increasingly less pie-in-the-sky. The Bank, which has been hiking interest rates to try to quash inflation, expects prices to be rising by around 4% by the end of the year, and if the overall inflation rate converges with its less volatile core rate – which in theory it should – you could say that target looks reasonable.

What does this mean for markets?

The UK stock market has been a surprising beneficiary of the world's cost of living crisis, with rampant energy prices a profit boon for some of the UK’s major energy firms. This partly explains why the FTSE 100 (an index of the UK's biggest firms) is at record highs. Now, if energy price rises grind to a halt or get thrown into reverse (the chief reason why the BoE sees inflation at just 4% by the end of 2023) that’d be welcome news for the UK’s consumers and its economy, but it’d be a bummer for oil giants like Shell or BP. Other FTSE 100 firms may not be pleased either: the UK’s big banks have benefitted from rising interest rates over the past year, and the country’s other commodity giants have been riding high on inflation-driven prices there too.

So the underdog of developed economies is looking a bit more like its old bulldog self, but stock investors should be cautious about joining central bankers in a victory lap any time soon.



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