FTSE 100: good news as index overtakes sky-high inflation

Alice Guy examines the latest figures and why the FTSE 100 is beating inflation.

Romance is in the air this week, but for many of us, rising prices mean our beloved might have to make do with a box of Thorntons this year, rather than 100 red roses.

Office for National Statistics (ONS) figures out today reveal that consumer inflation remains stubbornly high, despite dropping slightly to 10.1% in January, down from 10.5% in December. But falling inflation doesn’t mean prices are coming down any time soon, just that prices are rising a little bit more slowly.

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Meanwhile, for investors, the FTSE 100’s recent bull run takes the index to its highest-ever level and rewards UK investors with inflation-beating returns.

10.1% consumer inflation

In terms of day-to-day inflation, households are still feeling the pinch in 2023. Food inflation is still sky-high, with prices up an eye-watering 16.7% since this time last year. Meanwhile, energy costs are up a staggering 89.5% compared with January last year.

Although today’s headline inflation figure is 10.1%, everyone’s personal inflation figure will be different, depending how much they spend on different items. Essential costs such as food and energy tend to make up a bigger proportion of the household budget for poorer families, so their personal inflation figure may be higher than other households.

Myron Jobson, senior personal finance analyst at interactive investor, says that: “The continued dip in fuel prices remains a key contributor to the fall of the headline inflation figure, but high food and energy prices continued to put the pressure on British households. These types of inflation are sticky because we are resigned to paying it as they form part of essential expenditure for many.”

Why is inflation falling?

Inflation has fallen slightly from its peak of 11.1% in October, partly because it’s calculated annually: we’re now coming round again to a year from when higher inflation started. Inflation accumulates over time, so this year’s 10.1% inflation builds on top of last year’s 5.5% inflation to give a grand total of 16.2% inflation over the last two years.

Current high inflation is partly due to one-off factors, such as supply problems during the Covid pandemic. But it also reflects longer-term and hard-to-predict economic pressures such as Putin’s war in Ukraine and subsequent pressure on energy prices and ongoing wage-cost pressure with low unemployment and staff shortages.

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Getting inflation under control is difficult for central banks because they find it easier to influence demand, by raising interest rates, than influence supply-side pressures. And inflation is remaining stubbornly high, increasing the likelihood of further interest rate rises.

Cash returns lag, but stock market beats inflation

The impact of high inflation over more than one year is hugely detrimental both in terms of the value of our wealth and the amount of income we need to maintain the same lifestyle.

Cash savings invested in an easy access ISA two years ago would now be worth around £10,165, but would need to have grown to around £11,615 to keep pace with inflation.

However, when it comes to stock-market investing, it’s a different story and stock market growth over two years has actually exceeded inflation in the UK. The FTSE 100 is currently at an all-time high, nearly breaching 8,000 for the first time this week. And, despite a lacklustre performance in 2022, the FTSE 100 has managed to beat inflation over two years.

A total of £10,000 invested in the FTSE 100 in January 2021 would have grown to around £12,129 today, and that’s before taking into account dividend income. The FTSE 100 is only up around 4.7% this year, but has risen around 21.3% over two years.

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In contrast, the S&P 500 is down 7.4% this year, but up 51.4% over five years, and again that’s only price-based returns and doesn’t include dividend reinvestment.

It’s an important reminder that short-term stock market pain can often distract us from a long-term good news story. Even with the bleak inflationary pressures on our day-to-day finances, there are still many reasons for stock market investors to stay cheerful, keep calm and carry on investing.