UK inflation heading south (again) , and FTSE breaks through 7,000 (for the first time.)

22/3/15

UK inflation heading south (again) , and FTSE breaks through 7,000 (for the first time.)

See the Sunday Times , Business Section, p.1

Official data to be released this week will show that UK inflation is already close to zero and may be heading into negative territory sometime soon. Although the government's inflation target of 2.0 % looks a very long way away, a period of deflation would be neither totally unexpected nor disastrous provided that it is brief in duration. It does have implications for interest rates however, and has encouraged speculation that rates may even be cut from their current record low (0.5%).

Such speculation has helped the FTSE index through historic highs (set way back in 2000 at the height of the dotcom boom) and on Friday to break the 7,000 barrier. How significant is this move ? Many traders will argue (with some justification) that overcoming any psychological hurdle is important and brings a new range of prices into play. It has to be said however that the performance of the FTSE has lagged a long way behind other stock indices in the US and Europe. The attractiveness of the stock market is at least in part a function of the unattractiveness of other investments (remember bond yields ? low to negative). Still, in the UK's case one would have to admire the kind of courage required to go on any buying spree ahead of an election that could easily produce a result deemed decidedly market-unfriendly.