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CPI inflation remains at 8.7%

CPI inflation remains at 8.7%

21 Jun 2023

May is usually a relatively straight forward month for price increases and doesn’t tend to throw up big surprises in either direction.

Price rises over May in isolation were about the same as they were last in May last year, which explains why the rate of inflation hasn’t changed on April’s 12 month figure. This demonstrates that the inflation problem is still not contained.

This puts additional pressure on the Monetary Policy Committee to increase rates more than anticipated in the coming months.

Market expectations were for interest rates to rise to 5.75% by the end of the year, and with 5 announcements left that works out at 0.25% per announcement. However this news makes it more likelihood that we will see a 0.5% increase at some point soon.

Inflation at current levels can be very damaging to pensioner incomes in particular. Even where benefits are linked to inflation, annual inflation increases are often capped, for instance to 2.5%. This means that whilst inflation remains at this level, the real value of a pensioner’s pension is being substantially eroded.

The general inflation environment has been less of an issue for schemes and employers. Long term inflation expectations, which more heavily influence liability values, have been relatively stable. Furthermore, for pension schemes with high levels of hedging, capped increases can lead inflation hedge assets to outperform, as inflation hedging assets are usually uncapped.

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