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Experts await Omicron impact as UK inflation comes in at 10-year high

inflationInflation in the UK hit 5.1% in November as the country continues to battle the latest variant of Covid-19.

The 10-year high has reignited the debate among professionals as to whether rising inflation is embedded or transitory.

Investors have not yet felt the full impact of the Omicron variant or the wider impact of higher energy and consumer prices, according to Nigel Sillis, client portfolio manager at Cardano.

“It remains to be seen how ‘temporary’ the present raft of inflation-stoking supply disruptions are,” he said, “how current trends may be aggravated by Omicron and, beyond that, we have not yet seen the full effects of higher energy prices upon consumer prices more generally.

“There are still upside risks. Amidst uncertainty, pension funds should aim to fully hedge. However, schemes that use inflation sensitive assets as part of their growth strategies might find better value in Europe or the US; whilst inflation is high in these markets too, valuations are not quite as daunting as those found in the UK.”

Giles Coghlan, chief analyst at HYCM, said the new figures do raise questions over whether inflation in the UK will truly be transitory, though he added that the central bank is unlikely to act just yet to raise rates in light of the transmissibility of the Omicron variant, the energy crisis, and continued disruption to supply chains.

He said: “With the markets bracing for an interest rate rise, the Bank of England may be feeling unsettled – but investors shouldn’t anticipate the central bank to make the call just yet…under ordinary circumstances, one would expect the BoE to take a hawkish turn at the bank’s meeting on December 16 – but the current situation is far from normal.

“For now, expect the BoE to hold off on tightening until February, despite forecasts that British inflation will hit a 30-year high of 5.5% in the new year. Strength for GBP/EUR should follow, given that the European Central Bank remain comparatively dovish, behind the BoE’s tapering timeline."

Sillis added that although current inflation levels are not unheard of, market activity hints at the bank continuing to overshoot its inflation target in the future.

“Current levels of UK inflation are not unprecedented. There were higher peaks in CPI, and comparable peaks in RPI, recorded in both 2008 and 2011. More notable right now is the deterioration in market-based measures of future inflation, these point to an overshoot of the Bank of England’s inflation target for a prolonged period into the future. Pension funds are paying more to hedge their inflation risks today than they have been at any time in the past 10 years,” he said.

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