The Daily View: Inflation to remain ‘stubbornly’ high

Inflation will remain ‘stubbornly’ high into next year as currency weakness, combined with 2011’s hike in VAT, filter through the financial system, Axa Investment Managers’ Richard Marwood believes.

The Citywire A-rated fund manager, part of Axa’s respected Distribution funds team, says the double impact of an increase in tax and the weakness in sterling that hit last year will ensure inflation remains high.

‘One of the big questions of the moment is whether we think we are turning into Japan or going to have our current level of inflation for some time to come,’ Marwood said.

‘[We] are definitely in the latter camp and think inflation is going to remain stubbornly high for a while. We can see various reasons why that might happen.’

Rather than the UK following in the footsteps of Japan – which for the last 10 years has been caught in a deflationary spiral – Marwood believes problems linked to currency will ensure inflation prevails, compounded by the lift in VAT from 17.5% to 20% next year, which could add as much as a point on to the current level.

‘We’ve still got some of the problems of sterling being weaker a little while ago coming into the system  -  we've seen the finance director of Tesco talking about these currency effects coming through and suggesting we haven’t seen all of it priced in,' he said.

'Certainly, if you’re someone like Tesco you’re going to buy a lot a lot of your goods from abroad forward and you’ll be hedged and it takes time for those hedges to go up and they’ll be done at less advantageous rates.

‘That will all be passed on to consumers and we’ve certaintly seen it so far in food prices. That’s going to play out into inflation, and then there’s the direct impact of government policy when VAT goes up.

'The Office of National Statistics suggested that would put a point on inflation, so we can see reasons why inflation is going to stay high.’

However a continued high level of inflation could help shrink corporate, national and public debt by chipping away at its real value over time.

‘In a way we are inherently programmed to think inflation is a bad thing.  But given a lot of things the economy has to deal with – essentially too much debt at a personal, corporate and government level – then I think inflation can help us through if people are prepared to wait,' Marwood pointed out.

'The last think you want is deflation if there’s too much debt. You want inflation to gradually eat away at its value over time.’