UK stocks cling to gains as deflation fears mount

UK stocks rose this morning after the Bank of England revealed that consumer price inflation slowed to 0.5% last month – the first time it has fallen below 1% since 2002.

The weaker than expected reading for December means it is the first time inflation has fallen below 1% since June 2002 when it hit 0.6% Bank of England governor Mark Carney will now have to write a letter to George Osborne explaining the deviation of over one percentage point from the 2% target.

Michael Hewson, chief market analyst at CMC Markets, says today’s inflation data could start to shift timing expectations for a rate increase well into next year.

He adds: “Given current momentum on commodity prices, the fear remains that we may well not have hit bottom yet on oil or food prices. With prices already low, it might not take that much more to push us into sub-zero inflation territory and outright deflation.”

Ben Brettell, senior economist at Hargreaves Lansdown, reckons the fall in inflation is not a cause for concern. He argues that in contrast to the eurozone, where weak prices are, at least in part, a symptom of an ailing economy, that is not the case with UK inflation.

“Given the fall is almost entirely caused by cheaper oil and food, it is good news for the UK economy. The effect should be broadly similar to a tax cut, easing the pressure on household budgets and boosting consumer spending.”

Brettell says that today’s data further underlines the case for leaving interest rates on hold: “The effect of lower oil prices, plus the ongoing supermarket price war, could keep inflation below 1% for a number of months. I fully expect them to remain on hold throughout this year and into 2016.”

The lower than expected inflation reading for December led to the FTSE 100 gaining ground as investors concluded there will not be a rate rise any time soon. At 10am the index was ahead 37 points or 0.56% to 6538.5.

Retailers were in sharp focus this morning as they reported on trading over the festive period. Morrisons was a notable gainer after it announced chief executive Dalton Philips has quit following a disappointing Christmas for the supermarket chain. Total sales excluding fuel in the six weeks to 4 January were down by 1.3% with like-for-likes excluding fuel down 3.1%. Morrison shares put on 4.5%, or 7.9p, to 184.8p.

Debenhams slumped 8%, or 6p, to 69p after it revealed a weaker than expected 0.8% fall in like-for-like sales for the 19 weeks to 10 January.

Shares in Greggs the baker jumped 5.4%, or 40.5p, to 790p after it flagged better than forecast full-year profits and revealed an 8.1% rise in like-for-like sales for the five weeks to 3 January, compared with a rise of 3.1% a year earlier.

Elsewhere, online fashion retailer ASOS leapt 6.4%, or 156p, to 2583p after it revealed a 15% rise in like-for-likes for the six weeks to 9 January and maintained its profit guidance for the full year.