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Inflation has inched up again but hostilities over Ukraine seem to be ticking down and investors are seeking solace that for now there are no big shocks to the system.

The headline CPI rate has nudged up to 5.5% but it won’t move the dial of expectations much in terms of the Bank of England’s expected hike in interest rates in March.

So instead the market is focusing on what appears to be the easing of immediate tensions, with Russia’s EU ambassador saying an attack is not imminent and some troops moving away from the border.

National Landlord Investment Show – MPU

But there will be a close watch on a key NATO defence ministers meeting due to take place later amid suggestions the Russian military scale down can’t be verified.

After a small wobble at the open, the FTSE 100 has edged up in early trade but investors will remain highly sensitive to remarks coming from Russia and Western leaders.

The initial wave of relief over the chance that an invasion may be avoided has seen oil drop away from yesterday’s high of $96 with Brent crude falling to $92 dollars before nudging back up above $93.

The Ukraine situation is still making traders edgy but it’s unlikely the defusing of the situation will end oil’s rally given that it’s also been pushed up by an overall lack of supply in an energy demanding world.

That’s partly why BP has not lost ground despite the slight easing in the oil price and hopes of a de-escalation over Ukraine has helped the travel sector with British Airways owner International Consolidated Airlines ground lifting in early trade and Rolls Royce, which is highly dependent on the health of commercial air travel, among the top risers on the FTSE 100.

The latest UK inflation numbers indicate that rising fuel costs are once again among the driving forces pushing January’s prices higher.

The cost of living squeeze has become even tighter with January sales seemingly few and far between for consumer goods like fashion and furniture.

Just how long shoppers will keep splashing the cash will be an increasing cause for concern for retailers especially with the one two punch of another interest rate rise in March, and energy bills being hiked dramatically in April.

B&Q owner Kingfisher, Primark owner Associated British Foods and whisky producer Diageo were among the fallers in early trade, amid some nervousness about the ability of consumers to swallow higher prices.

Commenting on UK inflation rising to a near 30-year high, Rupert Thompson, Chief Investment Officer at Kingswood, said:

“UK inflation was higher than expected in January and continued its upward march.

The headline rate edged higher to 5.5% from 5.4% while the core rate increased to 4.4% from 4.2%. Inflation will head higher still over coming months, likely peaking at around 7.5% in April when the increase in the energy price cap feeds through.

Today’s data leave a further 0.25% rate hike in March looking all but a done deal.”

Commenting on higher than expected inflation but expected to ease by April or May, Dan Boardman-Weston, CIO at BRI Wealth Management, said:

“Inflation came in at 5.5% in January, ahead of the consensus expectations of 5.4%.

One of the largest contributors continues to be the price of fuel and this hasn’t been helped by the ongoing escalation between Russia and Ukraine.

Whilst some of this contribution came from a continued rise in prices, the base effect continues to play a large role, as prices were depressed last January due to various lockdowns across the UK.

The data continues to point towards another few months of rises in the rate of the inflation but we expect this to ease by April or May.

Given the strength of the labour market and the overall economy, it seems inevitable that the Bank of England will continue down the path of further rate rises.

It is important that the Bank is cautious with raising interest rates as a lot of this inflation still seems transitory in nature.

Raising rates at a time of high household bills and rising taxes could stifle the nascent economic recovery by putting the consumer under too much pressure.”

Susannah Streeter
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
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Susannah Streeter
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

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