Despite stronger-than-anticipated-earnings and profits from many UK Blue Chips since the start of this year’s results season, there are still conflicting views on whether UK companies can sustain this growth throughout 2011.

This, in part, has not been helped by news that the consumer price index (CPI) – the measure of inflation, which excludes mortgage interest payments – rose from 3.7 per cent in December to 4 per cent in January as a result of the VAT increase.

Worse still, UK companies are being faced with price increases from globally imported raw materials, but they may not necessarily be able to recoup these costs when they come to sell their own wares.

UK domestically-focussed companies, for instance, will need to assess how many cost pressures can be passed on to consumers in an economy where the customers are already facing serious price hikes in a variety of everyday goods.

Ted Scott, director of global strategy at F&C Asset Management, says CPI rising to 4 per cent is the highest number since November 2008.

He explains, ‘This was in line with expectations but some analysts were anticipating an even worse figure following several months when inflation data had overshot consensus.

‘In addition, core inflation rose again to 3 per cent which is much higher than in the US where it is less than 1 per cent. RPI, meanwhile, increased from 4.8 per cent to 5.1 per cent.’

Scott believes that there will now be increased pressure on the MPC to increase interest rates from the 0.5 per cent level where they have been for a record 23 months.

Many economists say that the fact that the majority of these price increases have been due to global factors, it does not necessarily follow that a rise in UK interest rates will alleviate the problem.

Scott continues, ‘The [Bank of England] governor is likely to argue, in his now regular monthly letter to the Chancellor, that the rise is mainly due to external factors outside its control.

‘These include the increase in VAT to 20 per cent at the beginning of the year, higher energy costs with the price of oil rising to over $100 per barrel and, especially, the recent rise in food prices reflecting the spike in soft commodity prices.’

UK Equities
Despite the ongoing debate about the inflationary outlook for the UK, the overwhelming majority of analysts and fund managers appear to be in agreement that UK equities will achieve over 10 per cent dividend growth in the coming 12 months.

James Henderson, manager of the Lowland Investment Company at Henderson Global Investors, explains, ‘Given the current low yields, this make a compelling story for shares. Inflation may pick up short-term, but in the developed world, wage increases are running at low levels and are unlikely to increase.’

Hargreaves Lansdown’s ubiquitous researcher Mark Dampier agrees, noting that investors need to divorce the stockmarkets and economies to some degree.

He explains, ‘Investors should concentrate on quality fund managers and not try and guess final outcomes, as views are so polarised.’

Controversially, there are some managers that believe that deflation is actually a bigger threat to Western economies.

Nick Train, manager of the Finsbury Growth & Income Trust, explains that he would prefer not to run money on the basis of guesses about macro-economic variables.

He says, ‘The prices of goods and services can rise and fall in response to supply and demand. Such price moves are not necessarily inflationary or even a sign of inflation elsewhere in an economy.

‘Broad money growth in the UK and other developed economies is low currently, while banks’ balance sheets are constrained and consumers are more interested in paying back debt than borrowing more.

‘All this suggest that the recent spike in the UK CPI reflects supply shocks in commodity markets, rather than a sustained devaluation of the purchasing power of money. Today, in fact, the real risks are those of deflation.’

US equities
Positive signals from across the pond coupled with solid earnings are giving a rosy picture for American stocks, according to analysts.

Inflation is another key concern in the US too, although the Federal reserve is unlikely to tighten policy any further.

A recent report by Charles Stanley showed broadly positive sentiment for the first six months of the year, although there is mixed opinion further afield as to whether any growth is sustainable in the second half.

Researchers at Charles Schwab agree, noting that they expect stocks to build on previous gains during the run up to the summer with indexes recently reaching their highest levels since 2008.

Kully Samra, UK branch director for Charles Schwab, says the trend since last September has been strong with only occasional pullbacks that have proven to be merely speed bumps.

He details, ‘We still expect relatively minor bouts of selling if sentiment and technical conditions get extended. However, as seen recently when the market pulled back roughly 2 per cent in session, nervousness over stocks remains among general investors, and pullbacks may be short-lived and shallow.

‘The resilience of the market has been frustrating for bears. With Middle East tensions escalating, debt issues around the world continuing and inflation concerns growing, positive momentum continues.

‘This supports the notion that the market is climbing a wall of worry. We remain on the side of the bulls and recommend using any near-term weakness to bring US stocks to your target allocation.’

This vote of positivity is echoed by analysts at Rathbones who say that now is the time to buy US equities. David Coombs, manager of the Rathbone multi asset portfolio, says emerging markets have been inflated by ‘hot money’ and now look expensive.

He explains, ‘Now is the time to take profits there and buy the US. It’s time for the politicians to take the lead from the Fed to stimulate growth.

Valuations look realistic and strong fiscal stimulus in the corporate arena is likely. ‘Following my recent US trip, I’m now more convinced that the US has the potential to continue to surprise on the upside.’