UK inflation unexpectedly halved in December to the lowest level on record as the sharp drop in global oil prices fed through to petrol pumps and the supermarket price war lowered shopping bills.
The consumer prices index (CPI) fell to 0.5% in December from 1% in November, sitting at its joint lowest level since equivalent records began in 1989. The only other time the CPI hit 0.5% was May 2000, and it has never been lower.
While the fall is regarded as a positive step for growth, for many investors, particularly those following LDI strategies, the fall puts further downward pressure on long term rates: the entire UK yield curve moved below 2% on the day fall was announced. As F&C’s Simon Bentley pointed out, this lower for even longer scenario may drive schemes to increase hedging now rather than wait indefinitely for a better opportunity in the future.
Kames Capital agreed tumbling inflation would keep UK interest rates at record lows in 2015. Head of multi-asset Scott Jamieson said: “The headlines are going to blame the slump in the crude oil price. However, the CPI rate has been slipping steadily for some time now and is less than 10% of the level reached in late 2011; only recently have lower energy costs been a contributory factor. Pricing power remains weak and although job creation has been heady it has not been accompanied by even moderate wage growth. Finally, the rise in strength seen through 2013/2014 has also taken its toll.”
Fidelity Worldwide Investment retirement director Alan Higham meanwhile said the announcement hid a “tsunami of higher inflation”. He added: “Over the next 15 years, the yields on inflation-linked gilts and fixed income gilts suggests that the market is expecting inflation to average 3% over the period. Inflation
could easily return to exceed 5% per annum within the next 15 years.”
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