UK inflation data doesn’t matter, says expert – here’s what to focus on instead

The United Kingdom has released a flurry of data in the past 48 hours, including the latest January inflation statistics and also the December 2023 GDP figures this morning, which revealed that the UK entered a technical recession at the end of last year.

We spoke to Nicholas Hyett, investment manager at UK high net-worth investment firm Wealth Club, for his take on the figures.

Latest inflation data 'doesn't matter'

Q) What did you think of the inflation figures yesterday, which showed that the UK inflation rate is currently at four percent?

A) I suspect today’s inflation numbers won’t matter – January is often a bit of a mess anyway. You get things like January sales, and that makes it difficult to see what’s really going on.

Then there’s the pressure from the wider market, and expectations of a rate cut that the Bank of England has intentionally built up. That means rate setters have more to consider than just the economic data that’s coming its way.

Q) So, what should people focus on instead?

A) Yesterday morning’s inflation data probably doesn’t significantly alter the narrative in the UK one way or the other. The bigger surprise was probably when US inflation came in higher than expected yesterday.

The US has a significant gravitational pull on interest rates in other countries, and that means shocks there tend to cross the pond. For example, yesterday’s surprise in the US caused bond yields to rise, and that has a ripple effect on other markets.

Also, I think the UK labour market tightness is interesting and could have a big impact on what the BoE will do – that is a big thing. It feels like there is a labour crunch in the UK. We have things like historic highs in long-term sickness contributing to a tight labour market in the UK, and that’s a potential driver of inflation.

Wage growth is a particular metric that the Bank of England pays attention to. They generally believe that energy price rises come and go, but labour market tightness has the potential to become sticky wage inflation.

The Bank of England doesn't want to cut rates soon - but they will

Q) When are we likely to see rate cuts starting in the US, versus when they'd likely start in the UK? 

A) I would be surprised if we didn’t see a first rate cut quite soon, by the end of the next quarter. That’s partly because central banks they’ve signaled so strongly that they expect to cut rate cut, that they need to follow through in order to maintain credibility.

A soft landing for the UK is 'doubtful'

Q: When people speak on the global economy in terms of rate cuts currently, they often refer to the United States as a kind of bellwether. Do you think the US backdrop, with its 'soft landing', is comparable to the UK? 

A: They are quite different economies. One of the biggest differences is that the US is a net exporter of energy while we are an importer. That makes rising energy prices more of a barrier to growth for the UK.

Another difference is in the UK labour market. By comparison the US has a much more flexible labour force and that helps to lower inflation.

As to whether or not the UK is going to replicate a US soft landing – it’s doubtful.