UK inflation hits two year high, Tesco shares likely to suffer UK inflation hits two year high, Tesco shares likely to suffer

UK inflation hit 1.8 per cent in January, within a whisker of the Bank of England’s target, but lower than expected.

 UK inflation hits two year high, Tesco shares likely to suffer

Stuart remains keen on Tesco shares

Ben Brettell, senior economist at Hargreaves Lansdown, noted that most of the increase was the consequence of rising petrol and diesel costs, as a combination of the fall in sterling and the rise in oil prices fed into the numbers.

Economists expectations had been for inflation to rise by 1.9 per cent this time.

The Bank of England has an official target rate for inflation of 2 per cent, but believes that the peak will be 2.8 per cent, in 218, before reverting back towards the 2 per cent target.

Read more: Is UK inflation going to keep rising?

The key question for investors is whether the fact that prices are rising faster than wages eventually leads to a fall in consumer spending.

Given that consumption presently accounts for around two-thirds of UK GDP, a fall in consumption would in time, lead to a decline in GDP growth.

It is notable that in his most recent inflation report, Bank of England governor pushed up his outlook for UK growth, but left his outlook for inflation unchanged.

If the central bank becomes overly concerned about rising inflation, the easiest course of action to remedy this is to increase interest rates.

The fact that Carney was cautious on the chances of inflation rising indicates that he doesn’t see an imminent need for rates to rise from here.

Kathleen Brooks, research director at City Index told What Investment that one of the factors which dampened inflation in recent months has been the continious pattern of discounting by retail companies, such as Kingfisher and Tesco.

Retailers face higher costs from imported goods, fuel and the national living wage, but are generally engrossed in price wars to win market share.

That implies that retailers will be unable to pass on the higher costs to customers, denting margins and profits.

Brooks opined that if the next slug of retail sales figures show a slowdown in volumes, share prices could start to suffer.

Comments (0)