UK CPI inflation rising to 2.6% has been taken remarkably well by traders on Wednesday, with banks, retailers and oil stocks helping the FTSE 100 higher.
Rising inflation will be a concern for investors hoping for lower interest rates, but the initial reaction to CPI rising to 2.6% – bang in line with estimates – suggests there was some relief the reading wasn’t higher. The composition of the increase in inflation suggests it could be transitory which helped soften the blow.
“Inflation is staying put for now, like an unwelcome Christmas party guest hogging the sofa into the small hours. The question is whether it can be shifted, or if it’s going to hang around to ruin our plans for months – eating us out of house and home and driving up the cost of everything again,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“Transport helped drive inflation up, because petrol prices were higher. The oil price fluctuated throughout the month, partly on the back of geopolitical tensions, but also as a result of the market digesting the likely impact of a Trump presidency on supply and demand.”
Foreign exchange markets were the clearest indicator of relief the CPI reading wasn’t higher. The pound fell against the dollar which in turn provided support for the FTSE 100’s overseas earners.
“A weaker pound following the latest UK inflation figures gave a boost to the FTSE 100 and its bounty of dollar earners. The UK index rose… led by Shell and BP, with Ashtead among the big US-focused players giving support,” said Russ Mould, investment director at AJ Bell.
“UK inflation at an eight-month high sounds dramatic yet the annual 2.6% rate is bang in line with expectations and core inflation, which excludes food and energy, at 3.5% came in lower than the 3.6% consensus figure. As such, we haven’t had what the market would describe as an ‘inflation shock’. That explains why shares in interest rate-sensitive sectors like housebuilding haven’t retreated on the latest figures.”
Banks enjoyed higher inflation and the prospect of interest rates staying higher for longer. Lloyds rose 1.6% and NatWest added 1.2%.
Frasers Group ticked 1.8% higher on the news consumers’ discretionary spend wasn’t about to be slashed by the return of high levels of inflation.
IAG continued its march higher on Wednesday after Jefferies hiked its price target to 350p and was the FTSE 100 top riser.