PPS Investments: CPI for April 2023

Consumer price inflation increased by 6.8% year-on-year in April 2023, which was a decline from the 7.1% year-on-year print in March.

This year-on-year decline comes after two successive marginal increases and may indicate the effect of recent interest rate hikes on inflation reduction. Inflation still averages 7.0% for the year to date and remains above the South Bank Reserve Bank expectation of where it should average for the full calendar year. Month-on-month inflation increased by 0.4%, compared to the 1.0% increase in March.

The largest contributor to inflation continues to be food and non-alcoholic beverages which increased by 13.9% year-on-year, slightly better than the 14.0% increase last month. This resulted in a 2.4% contribution to inflation. Other large contributors to inflation remained, transport (1.1%), household contents and services (1.0%),and miscellaneous goods and services (0.9%). Electricity and other fuels increased by 8.2% year-on-year, but this is likely to increase further as approved electricity price increases are due to come into effect in the next few months.

This slight moderation in inflation is unlikely to persuade the Monetary Policy Committee (MPC) to pause the hiking cycle but may result in a 25-basis point increase as opposed to the possible 50-basis point increase, we saw in the last MPC meeting as inflation remains above the top end of the target band. The hiking cycle has meant that cash as an asset class is delivering a more competitive yield. On the other hand, domestic bonds have lost some capital value as rates have edged higher. In the PPS portfolios, we reduced some bond exposure for cash even though bond yields remain high as the risk-adjusted return has shifted in favour of cash. We maintain a sizable allocation to inflation-linked bonds as yields are competitive, but also as an insurance against any surprise inflation should that materialise.