The real concern behind inflation data

Article Abstract:

United Kingdom inflation is lower than expected and this could attributed to the high value of pound sterling, but closer examination shows this not to be the case. Inflation may be sticky, and respond less to demand and foreign exchange rates than previously thought. Profits of exporters could act as one cushion in reducing the impact of pound sterling, while importers may benefit from higher profit margins. Price rises may not follow rises in demand since more new customers can be gained from price cuts if demand is strong. Falling exporters' margins could affect employment and investment, while higher rates of interest than estimated may be needed to curb inflation if it is sticky in this way.

Prices

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Little joy in falling inflation

Article Abstract:

British inflation is likely to have dropped to 2.2%, or less than the government's target of 2.5%, and is likely to remain low for some months. It is unclear whether low inflation will mean a drop in yields for government securities (gilts). Price and wage inflation could rise as a result of a tight labor market. The strength of pound sterling has helped to depress inflation, but this could change. There could be a rise in imports, or capacity constraints could become evident. British interest rates may be raised, despite low inflation. Investors should seek companies able to provide earnings growth even when margins are under pressure.

Analysis, Portfolio management

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