Commenting on the CPI update and the impact for the pensions industry, Ben Farmer, Senior Investment Consultant, Hymans Robertson says:

“From a pension scheme perspective, this morning’s CPI release will have been closely watched in the pensions industry, as it forms the basis for many pension schemes’ annual benefit increases which will be applied in April 2023.

“Most private sector defined benefit schemes’ annual increases for pensions in payment are capped, often at 3% or 5%. The index-linked gilts that many schemes hold as part of their risk management strategies have no such cap on their inflation linkage, so at the margins well-hedged schemes might expect to benefit from a funding perspective from high inflation. For less well-hedged schemes, this marginal gain from uncapped assets vs capped liabilities will likely be outweighed by the general increase in the liabilities from high inflation.

“For deferred members, i.e. those who are no longer accruing DB benefits but who have not yet retired, the revaluation of their benefit entitlement is increased in line with inflation. Here, the annual caps are typically applied cumulatively, so deferred members stand to benefit to the full extent of (currently high) inflation.

“This morning’s release will no doubt raise the question with pension scheme trustees, and sponsoring employers, of whether to award members discretionary increases to benefits. These conversations often haven’t taken place since the 1990s, when the macroeconomic and pensions landscapes looked markedly different. The balance here is the desire to protect pensioner members in the current high inflation environment, versus the increase in pension scheme liabilities this would cause."

Commenting on the CPI update in light of recent market volatility, Chris Acari, Head of Capital Markets, says:

“The very small upside surprise in headline CPI inflation (10.1% versus 10% expected) will do little to alter the immediate outlook for rates and inflation. The Bank of England were already expected to deliver at a 0.75% p.a. rate increase in November, and a similar increase in December. The small upside surprise in headline and, more importantly, core inflation, which rose to 6.5% year-on-year, will only serve to strengthen the resolve of the Bank of England.

“The large rise in the energy price cap in October means CPI is expected to peak between 10-11% year-on-year that month. The outlook for inflation beyond the very near-term has become less certain. In some respects, the undoing of the government proposed fiscal loosening will mean lower inflation pressure in the medium-term, potentially reducing the need for the BoE to act as aggressively. At the same time, the reduction in the energy price guarantee package means headline inflation could spike once more in April 2023.

“Expectations for the peak in interest rates in 2023 have fallen back from their highs of close to 6% p.a. since Jeremy Hunt, the replacement Chancellor, rolled back much of the proposed fiscal loosening in the “mini” budget. At time of writing, markets expect the bank of England base rate to peak around 5.3% next year, while consensus forecasts suggest the bank may raise rates slightly less than this.

“Regardless, along with other major central banks, the Bank of England are increasingly shifting to the view that the recent rise in inflation is persistent and are setting policy to achieve a sustained return to target. While markets still assume this will be achieved over the next year or so, they also suggest this will require higher interest rates than previously expected. The rebalancing of economic supply and demand is likely to require a period of below trend economic growth.”