Unions threaten action but inflation is under control

The TUC conference takes place this week amid rising threats of strike action over public sector pay, but leading fund manager Ted Scott remains sanguine over UK inflation.

Scott who manages the top performing F&C UK Growth & Income Fund, said threats from the Communication Workers Union, which represents Royal Mail staff, and the Prison Officer's Association to stage a fresh wave of strikes, actually demonstrate the Government's commitment to keep public sector pay within its targets and are not a sign that inflation is a serious problem.

The Bank of England's quarterly inflation report which projects another 25 basis point rise in interest rates in order for inflation to fall to its 2% target in two years, has also led some industry commentators to forecast a further hike in the base rate before the end of this year. But according to Scott this is unlikely.

"Inflation is something the Bank of England is very vigilant about but the most recent inflation data was actually much lower than expected. Although a further hike in interest rates is not out of the frame completely, the Bank is wary of putting more pressure on consumers," he said.

Scott said the credit crunch of recent weeks, which has seen bank lending dry up and mortgage rates rise would start to take its toll on the consumer pocket over the next couple of months as many fixed and discounted mortgages run to term and are refinanced.

"There are already signs that consumer expenditure is slowing on the high street with retailers such as French Connection, JJB Sports, Next and Homebase all reporting a tougher sales environment. JJB Sports issued a profit warning this week and even among those retailers with improving profits, the margin support is being driven by better cost control rather than actual sales," said Scott.

One area of concern which could see the Bank consider a further hike in rates is food price inflation.

"Food price inflation has been climbing quite high recently following a bad harvest and competition from alternative energies such as ethanol, forcing up the cost of wheat and grain prices. Last month's discounting of basic food stuffs was the result of a supermarket price war which is likely to only give short term respite.

"If inflation continues to rise then the Bank of England may consider further rate rise in the future but the general consensus in money markets is that they have peaked," he concluded.