We are facing material inflation across a broad swathe of inputs, from ingredients to energy and labour. In the UK, the rate of inflation will likely top 10% by the autumn, which will put pressure on demand.
We have looked across our coverage to identify sectors and companies we believe to be well placed to manage the current inflationary environment, as well as relatively
insulated from a more subdued demand environment.
This week has seen another stronger than expected UK inflation reading for February, and another new high in the headline CPI rate dating back to March 1992. The ONS rightly pointed out that the UK’s +6.2% YoY rate is broadly in line with the other developed economies. However, the acceleration can no longer be attributed solely to the energy price-driven increase in utility bills and transport costs, which were responsible for most of the rise in 2021.
Eleven of 13 subsectors contributed positively to the increase in the annual rate last month, including the key categories of food and clothing; the furniture & furnishing and recreation & culture sectors also reported price rises. Factory gate inflation moved above +10% YoY for the first time since the global financial crisis.
A peak above in the headline rate+8% YoY in April remains likely, while the outlook for 2H is highly uncertain. The next Ofgem price cap review, scheduled for October, will be the key swing factor and may be less extreme than feared, if the recent reversal in gas prices is sustained; European futures have halved from their early March levels, while remaining extremely volatile. In the near term, however, UK households are unlikely to see the cost of living crisis ease.
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