Market report: Price pressure relief as UK inflation stable and oil falls further
Susannah Streeter, chief investment strategist, Wealth Club: “The Footsie is flat in early trade as the easing of oil prices weighs on energy giants, but consumer-focused stocks are rising as there’s light at the end of the tunnel for households dealing with a deluge of higher bills. Clothing retailers, housebuilders and airlines have nudged higher as the chances of rate hikes ease off and hopes are high that consumers may have a bit more to spend than expected.
The pressure cooker of prices is off the boil with inflation staying stable and oil prices retreating further. May’s surprise inflation reading for the UK will add to hopes that the cost-of-living scare induced by the Middle East crisis will be shorter-lived. It shows that despite higher energy costs infiltrating fuel prices and air fares, underlying price pressures are easing across the economy.
While inflation remains above the Bank’s 2% target, disinflationary forces are creeping in. Housing and household services inflation eased to 2.7% from 3%, while food and non-alcoholic beverage inflation slowed further to 2.2% from 3%.
This reinforces expectations that the Bank of England will press pause tomorrow and keep interest rates at 3.75%. It’s likely to mean policymakers will hold off on increasing rates until later in the year. It would give more time to assess if higher energy costs are being passed on, or if this is a temporary external force that will ease off more quickly. There’s even a small but growing chance that interest rate hikes could be taken off the table.
With the economy struggling, the labour market looking weaker, and consumers staying wary, conditions are likely to continue to exert downward pressure on inflation, without tinkering with monetary policy.
The latest drop in oil prices, which have fallen for the fifth session in a row, will also reassure policymakers that acute price pressures are easing. With the signing of the Iran deal set for Friday and more details coming through, Brent crude, the benchmark, has edged down to $78 a barrel, the lowest level since early March. Traders are increasingly pricing in the prospect of a significant boost to global supplies.
The deal is set to include broad economic incentives for Tehran, including the immediate resumption of oil exports. At the same time, tanker traffic through the Strait of Hormuz is expected to start to normalise, although shipping companies remain wary about whether the agreement will hold and whether disruption could be sparked again. With repairs still ongoing to facilities across the Gulf region, this may also limit flows. This is why crude is still trading around 30% higher compared with January levels, before tensions in the Middle East began to ratchet up.”