You may think I’m referring to the age-old question one looks forward to whilst driving on a family day out with kids. Not this time, the question in this instance refers to the cycle of interest rate rises. We have now had 14 consecutive interest rate hikes with our base rate sitting at 5.25%. With the latest inflation report out this week and the MPC meeting late September, the question being asked and one I keep asking myself is, are we there yet?
Looking at the data, the last inflation report came as a pleasant surprise, to myself and the Governor, I’m certain. Consumer price inflation came in at 7.9% in June on an annual basis, from 8.7% in May. That was comfortably below consensus of 8.2%. Core inflation also beat the consensus, falling to 6.9%. The next update will be Wednesday, 16th August. This should give an indication where we stand.
Looking across the pond, US Core Inflation Price (CPI) data out last week, 10th August, showed a gain of 0.2% last month, lifting the annualised rate to 3.2% from 3% in June. Even with the slight uptick, this did beat consensus. A minor setback, although it was unlikely to fall in a straight line. US CPI peaked at 9.1% in June 2022 and has come down sharply. Although the US and UK are different beasts, the US often leads and we follow.
It is also worth looking at China which is in deflation. Bank lending in China has collapsed to lows not seen since the financial crisis as household demand slumps. Imports and exports are also falling sharply. The inflation cures were already largely in the pipeline so, with the added Chinese input, this should see global inflation fall rapidly.
Resisting the need to go into food price inflation and the other data we have been following, the fly in the ointment may well be the UK GDP growth of 0.2% for the second quarter. I had started to believe we were there, but this data may convince the MPC into a further increase of 0.25%. Hopefully that will complete the cycle or at least give reason to pause.
I have hopefully answered my question. Maybe the answer is similar to the car journey. We’re on the way and we’re nearer to our destination than our starting point. We’re very close!
iShares UK Dividend ETF (IUKD)
With the above in mind, if you are looking for UK exposure to the potential upside of a positive inflation report or a strong domestic UK market, the above is a good option. With direct investment in 50 companies within the FTSE 350 with an emphasis on income, yield is just under 6% currently. This has a risk category of Moderate.
UPDATE – Eli Lilly
Eli Lilly, which was mentioned in this forum on 9th May, provided second quarter results last week. Q2 profit jumped 85% from the same period a year ago on strong sales from their drug pipeline. A big boost came from Mounjaro, a tirzepatide injection drug used for treating type 2 diabetes, which posted $979.7 million in sales for the quarter. The drug was first approved in the US in May 2022 and achieved just $16 million in sales in the year-ago period. As we mentioned in the previous blog, this could well be a blockbuster drug if they gain approval from the Food and Drug Administration to license the drug as an injection for chronic weight management. Shares are up 22.5% from our initial recommendation and we still see further upside in the company.
Neil Morss
Chartered FCSI
