UK inflation hits 6.2% ahead of the spring statement

Stocks continue to rise despite surging inflation and the ongoing Ukraine war, helped in part by a global bond rout.

• Stocks rise despite record bond selloff
• GBP falls after CPI hits 6.2% YoY on fears of slowing growth should the BoE hike rates again
• Spring statement could see some measures to support households as the cost-of-living soars

While global bonds plunge the most on record thanks to rising inflation, stocks have ended up as beneficiaries of the capital flows out of fixed income. Higher yields are usually the bane of tech stocks, but recently, that hasn’t been the case. The Nasdaq rallied just shy of 2% yesterday, outperforming its peers on Wall Street and rising to a monthly high, a level last seen before the Russian invasion.

Stocks are rallying even as expectations for a more hawkish Federal Reserve keep building. The market is now pricing in a 70% probability of a 50-basis point rate hike at the next FOMC in May. Fed Chair Powell is due to speak again later today.

Meanwhile, in Europe, the FTSE closed at a three-week high in the previous session and is set for a sixth straight day of gains ahead of the Chancellor of the exchequer, Rishi Sunak’s spring statement due at 12:30 PM GMT.

CPI

The spring statement comes as the cost of living continues to push higher. The latest inflation data, as measured by the consumer price index, jumped to 6.2% YoY in February; this was up from 5.5% in January and ahead of the 6% forecast. The rise of inflation to a fresh 30 year high comes even before the fallout from the Russian invasion started to be felt.

Following the start of the Russian war, oil, energy, and commodities prices have been rising, which will lift inflation further from March.

The BoE has already hiked interest rates three times in an attempt to tame three decade-high inflation. Interest rates are now back to the level that they were pre-pandemic yet rising inflation will keep the pressure on the central bank to hike again at the next meeting in May.

While the pound rallied higher in the previous session versus both the euro and the USD, GBP is falling following the release. Another rise in interest rates will exacerbate the pain of already struggling households and raise concerns over slowing growth.

Spring statement

Attention will now turn to the Chancellor’s mini-Budget and the measures he could take to help hard-pressed families and businesses as the cost-of-living soars.

After yesterday’s data, the Chancellor has around £25 billion more to spend than initially expected in October, thanks to rising tax receipts and higher inflation. However, he prefers to keep the big giveaways for October. Still, there are several measures that Rishi Sunak could consider taking, such as cutting fuel duty, a VAT reduction for the hospitality sector, and raising the threshold for National Insurance contributions. The Chancellor could still press ahead with the rise in National Insurance contributions which would negatively impact both businesses and consumers simultaneously, a move that could hit demand for the pound.
Any sign of a windfall tax on energy firms could send energy stocks lower, while higher defence spending could boost the likes of BAE Systems.