“This week’s rise in inflation is the first real evidence of Brexit hitting people’s wallets as the price of restaurants, hotels, transport and alcohol starts to rise, taking headline consumer price inflation to 1.0% year-on-year, the fastest rate of growth since November 2014,” says Russ Mould, Investment Director at AJ Bell.
“Marmitegate was the sign of things to come as the cost of imported goods and raw materials from abroad increases due to the weak pound and this could lead to further price rises over the coming months.
“This would have a real impact on the spending power of people’s salaries and could be the first time they have felt any pain from the vote to leave the EU.
“Too much inflation could also encourage the Bank of England to raise interest rates so consumers would be hit by a double whammy of rising prices and higher borrowing costs.
“The yield on the 10-year Gilt is already back above 1.0%, way higher than its summer lows near 0.5%, and this could start to affect interest rates on debt across the board, from mortgages to corporate bonds, making borrowing more expensive, whether the Bank of England likes it or not.
“From an investment perspective, history shows that a bit of inflation is not a bad thing for stock markets and certainly better than deflation or stagflation. However, if too much inflation causes the Bank of England to raise interest rates or drives Government bond yields higher then investors could be lured away from stocks and back toward cash or bonds, removing some of the support given to share prices by the premium yield that is currently available from equities.”
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.
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