Inflation drop good news for equities, says F&C

For the first time since September 2007, the Consumer Prices Index (CPI) for June came in at 1.8%, below the upper end of the Monetary Policy Committee's (MPC) target range of 1-2%. In contrast, core inflation remained stable at 1.6%.

This news was slightly better than expected and believed to be as a result of falling contributions from energy costs and food prices, which itself was partly due to the strength in Sterling.

Ted Scott, Director of UK Strategy at F&C, believes that whilst fears of deflation remain distant, the good inflation numbers are encouraging news for the equity market. "A lower inflation figure tends to contribute to a higher rating for the equity market if it can be sustained", he commented. "It should also embolden the MPC and the Government to extend the quantitative easing programme if it is deemed necessary".

Last week, the MPC surprised the market by not increasing its current programme of ‘QE' from £125bn to £150bn (the maximum allowed) or indeed applying for an increase in the programme beyond £150bn.

Scott concluded "News that inflation is down means that it is more likely the MPC will request an increase in the QE programme at the next meeting in August, if there is still scant evidence that the extra liquidity is being transmitted into the real economy. Whilst commodity prices have fallen more in July, I believe the CPI will probably continue to fall back next month".