Our views

Inflation increase sends gilt yields higher


Craig Inches, Head of Short Rates and Cash

12 December 2017

After sitting pretty at 3% for the past two months, the Consumer Price Index (CPI) jumped over 1% above target in November to 3.1%. This puts inflation at its highest level in five and a half years, though we still think that it’s unlikely to move much above this peak, as sterling has risen steadily higher against the dollar over the past year and most of the effects of last year’s devaluation are now embedded into prices. 
Gilt yields jumped slightly in the aftermath of the announcement as markets digested the news while sterling rallied then fell back against the dollar, although the biggest excitement for pundits will be Mark Carney’s forthcoming letter to Philip Hammond. The detail of this letter and the reasons given for this persistent inflation overshoot could actually be a positive for investors hoping for fresh guidance on the path for UK interest rates.
With Brexit uncertainty still weighing heavy on the Bank’s forecasts, we think Mr Carney’s words are much more likely to be a robust defence of the Bank’s existing position than any plea to the Chancellor to forgive the Monetary Policy Committee for its sins in allowing inflation to run away with itself.

After sitting pretty at 3% for the past two months, the Consumer Price Index (CPI) jumped over 1% above target in November to 3.1%. This puts inflation at its highest level in five and a half years, though we still think that it’s unlikely to move much above this peak, as sterling has risen steadily higher against the dollar over the past year and most of the effects of last year’s devaluation are now embedded into prices. 

Gilt yields jumped slightly in the aftermath of the announcement as markets digested the news while sterling rallied then fell back against the dollar, although the biggest excitement for pundits will be Mark Carney’s forthcoming letter to Philip Hammond. The detail of this letter and the reasons given for this persistent inflation overshoot could actually be a positive for investors hoping for fresh guidance on the path for UK interest rates.

With Brexit uncertainty still weighing heavy on the Bank’s forecasts, we think Mr Carney’s words are much more likely to be a robust defence of the Bank’s existing position than any plea to the Chancellor to forgive the Monetary Policy Committee for its sins in allowing inflation to run away with itself.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.