WeeklyWatch – UK inflation woes return

28^th May 2025

Stock Take

Inflation is on the rise again

Inflation makes an unwelcome return… In April, UK headline inflation increased to 3.5% – the highest level seen in over a year and which surpassed the expectations of both analysts and the Bank of England.

With higher inflation figures, costs of some goods and services will increase for consumers, which will come as disappointing news when it was widely believed that the economic tide was turning in their favour. Increased inflation figures aren’t usually welcomed by investors either, as they erode the real value of investment returns.

For bond investors, the picture is more mixed. A rise in inflation usually results in lower bond prices. Additionally, inflation reduces the purchasing power of the yield on bonds (the interest payments) which makes them less attractive. Consequently, yields on bonds usually go up to try and draw in investors.

The recent inflation figures have diluted hopes of further cuts to the Bank of England base rate. But the Director of Advice at St. James’s Place, Alexandra Loydon, says:

 “The higher-than-expected rise in inflation has likely brought this optimism to a halt.”

The Head of Economic Research at St James’s Place, Hetal Mehta, agrees that interest rate cut prospects have ‘receded’. In addition to the recent inflation figures, she highlights the meeting of the Bank of England’s Monetary Policy Committee (MPC) that’s taking place in May, describing it as “hawkish”.

“While the rate cut announced by the MPC in May was expected, the fact that two members voted for no reduction at all was a surprise. In fact, Huw Pill, the BoE’s chief economist, has since been hawkish in his view and last week talked down the need for further aggressive interest rate cuts.”

Markets are now factoring in one to two further rate cuts by the BoE by the year’s end. Mehta identifies that earlier this month, before the MPC meeting, there had been an expectation for three rate cuts in the second half of 2025.

Many moving parts

Rising UK inflation has resulted in concerns in some quarters about an economic slowdown, whereas others say this is too soon to tell. There are many moving parts that have an impact on UK inflation which include the energy element as the energy cap was increased in April, which has fed the higher inflation. Additionally, firms have indicated that the higher costs of national insurance will be passed onto consumers.

Mehta says the largely anaemic UK growth will likely have the opposite effect on inflation figures longer-term.

“It may just be a case of sequencing and timing. When we look at what the market is expecting, UK inflation is expected to pick up a bit as we head into the next few months and then start falling slowly.

“In the near-term, the commodity price increases from a few months ago will continue to exert more upward pressure on inflation.”

Mehta adds that while UK inflation is moving upwards, to date it hasn’t been substantial and is unlikely to be.

“Inflation had fallen back significantly after the initial Russia/Ukraine shock but there are signs that it’s sticky and it’s unclear how quickly inflation can get back to the 2% target.

“It would take a huge, unpredictable shock to see double-digit inflation again.”

For a more positive outlook, the UK economy is resilient and can withstand a fair amount of volatility. The independent central bank is able to adjust interest rates when necessary to respond to the economic changes. And unlike the US commentaries, it’s not under huge government pressure to move fast when it comes to cutting interest rates.

The impact of inflation is felt in everybody’s lives, but the likelihood of returning to a higher inflationary environment that caused widespread issues a few years ago is highly unlikely as it stands.

Inflation elsewhere

Is current inflation an upward trend? Or simply swings and roundabouts? In 2024, we saw the largest global increase in inflation since 1996 (Statista) at 5.76%, even though across wealthier Western economies, inflation spiked at 11% in 2022.

Across the pond, the inflation outlook for consumers doesn’t look much better than in the UK, as Trump’s tariff policies are likely to increase inflation and future rate expectations. The University of Michigan recently published their figures which showed that consumers predict that inflation will rise by an annual rate of 7.3% over the next 12 months.

US–EU trade discussions

There was another injection of volatility to the markets last week following some quick-fire announcements from President Trump in regard to the potential EU tariffs. On Friday, he announced that from 1^st June, there will be a 50% tariff on EU imports – driving markets down across both continents.

Thankfully, the volatility was short-lived. Trump agreed to delay the introduction until 9^th July which will give the regions more time to negotiate a trade deal. Even though markets have responded well to the delay, the rapid and unpredictable changing events exemplify the mantra: ‘Time in the markets, not timing the markets.’

Wealth Check 

Numerous factors can impact the growth or restriction of a small or medium-sized enterprise (SME), ranging from limited internal capabilities to external elements like supply and demand.

The Business Growth Advisor at Elephants Child, Kevin Petley, identifies four key areas for SMEs to strengthen their market position and increase growth that’s sustainable…

1. Market access – In order to gain a foothold in any market, you have to look beyond just offering a product or service. Essential to your success will be elements such as brand recognition, optimal distribution channels and compliance with regulatory requirements.
2. Competition – Businesses rarely have no competition. For SMEs, their competitors tend to be larger companies with more significant economies of scale. This is where your unique value needs to be leveraged in order to boost your growth.
3. Networking and partnerships – Many business owners often express little confidence in this avenue, saying that they don’t see the benefit or simply don’t have the time to put aside for networking. It can mean that you miss out on impactful insights and isolation can limit growth. Laying the groundwork now is important to reap future benefits.
4. Customer demand – When businesses have spent time analysing their potential for growth they’re in a better position to enter a market and experience growth. As part of the analysis, businesses should determine the size of opportunity, monitor competitor activity, decide on pricing and consider possible volatility including seasonal movement.

Going beyond enthusiasm

A successful business will have innovation, enthusiasm and commitment at its heart, and to accomplish this requires effective planning, researching and good financial management.

In order to grow, it’s essential that businesses take all available options into consideration, understand the levels of risk involved and put clear measurements in place in order to track progress. This allows business owners to quickly validate success or anticipate and identify where change is needed in a timely manner. This will put your business on a stronger growth trajectory.

We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for sale. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

In The Picture

As soon as stocks start to fall, the temptation is usually to sell and sell fast!

But if economic history has taught us anything, it’s that when markets are down, panic selling does your long-term finances no good.

Not long ago, American indices rapidly fell following the Liberation Day tariff announcements. Giving into temptation and selling in the subsequent days would have locked in the losses.

Following this, the S&P 500 has recovered well and is now higher than it was pre-Liberation Day. By panic selling holdings before the recovery, the losses will have been locked in, and you’ll have missed out on the benefits that came from the recovery. Patience is a virtue.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

Past performance is not indicative of future performance.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 27/05/2025