Belts tighten as gloom hits 40-month high….

Tuesday 28th March 2017

Belts tighten as gloom hits 40-month high….

We have no musical training at Money Truths – but we know how to blow our own trumpet….

I was talking about the specter of inflation as early as last September – when the latest-available CPI inflation figure was 0.6% and economists were worrying about deflation and the effects of falling prices….

I was marching to the beat of a different drum. Taking the contrarian stance. But I know how quickly the economic weather can turn….

And I understand how much damage a sustained period of credit expansion and abnormal near-zero interest rates can do to an economy….

It came as no surprise that consumer prices rose by 2.3% in February – exceeding forecasts, shooting past the Bank of England’s (BoE) 2% target and hitting the highest level since 2013….

It was inevitable. If you increase the money supply with billions-of-pounds worth of fresh credit, rising prices are the unavoidable effect.

Back in September I was certain rising prices were coming. Now they have arrived….

  • Everything is going up….

Transport costs were the biggest driver behind last month’s rise. People are paying more to get to work, do the school run and head into town….

Fuel costs 19% more than it did last year – thanks to higher oil prices and the weak post-Brexit pound.

It isn’t just consumers paying more. Business are paying higher prices too….

That’s one reason the cost of the weekly shop – in annual terms – has risen for the first time in 30-months….

Importers, producers and processors are passing on higher energy costs to consumers – as well as higher costs for ingredients….

You will notice the effect in your shopping trolley. My wife has a keen eye for prices and tells me everything has gone up.

  • Gloom just registered a 40-month high….

Today’s pound buys less than it did. Your salary doesn’t stretch as far. What you have is worth less than it was.

That’s how inflation works. It diminishes disposable income, reduces spending power and erodes savings….

No wonder the unofficial gloom index is up – rising in tandem with the cost of living….

Markit’s Household Finance Index reports that the 12-month financial expectations of Britons have dropped from 48.1 to 45.3 – the lowest reading since November 2013.

Gloom has hit a 40-month high….

Tim Moore, A Markit economist says: ‘A combination of rising inflation and subdued pay trends has forced households to recalibrate their expectations….’

But real people don’t ‘recalibrate expectations’.  They just get fed-up with an environment where everything costs more – except their time and labor….

A recent BoE survey reports businesses are succeeding in keeping labor costs down. Wages are not rising as fast as the cost-of-living. The news that will not help lift the gloom of the average British householder….

  • Less purchase power, less purchasing….

What is good for the economy is often not so good for the man-on-the-street. Rising prices, for example….

For an economist rising prices are a welcome elixir to the economy – they boost figures and represent growth.

What does it matter if the average family must tighten its belt? What does it matter if the price of a working man’s labour buys less than it did?

Who cares if the average British householder is gloomier than he was 4-years back?

These things don’t matter a jot if the health of the overall economy improves. A healthy economy provides trickle-down benefits for all….

But, if the British householder’s pound buys less stuff than it once did, he will inevitably buy less stuff. And that has an effect too….

  • A major driver is faltering….

The economy is heavily dependent on consumer spending. When that dries-up, growth stalls and the economy falters.

And there are signs that rising prices are starting to impact on consumer spending….

In the last 90-days, retail sales shrank faster than at any time in almost 7 years – contracting by 1.4%. That’s the biggest decline since March 2010.

Clothing retailer Next is ‘extremely cautious’ about its prospects – because of inflation. Next recently reported a fall in profits – the first since 2009.

Royal Bank of Scotland’s chairman, Howard Davies, said last week that he’s ‘slightly nervous’ about growth prospects. ‘The UK economy is not quite as robust as it looks, because it is rather heavily dependent on consumer spending….’

  • Safety nets are threadbare….

Households are feeling squeezed. Consumers are feeling gloomy. Many are worried – with good cause.  They are vulnerable to a downturn in fortune….

A House of Lords committee revealed last week that 40% of the working-age population held less than £100 in savings.

There’s a savings crisis. Many British households don’t have a safety-net to rely on in hard times….

Times are suddenly feeling harder than they did. Households will be keen to reign back spending and to hold what they can.

It may be a case of too-little too-late. But such new-found frugality will further squeeze
Retailers and impact the wider economy….

  • It can get worse….

The BoE expects inflation to peak at 2.8% next year. But remember: it was wrong about last week’s figures. And it was wrong about inflation after the global financial crisis.

Independent forecasters suggest inflation could rise to 3%. Even that might prove a conservative estimate.

Nobody knows what the effect of triggering Brexit will be. Nobody knows how badly sterling might be affected. Nobody can foresee what might happen to the price of fuel, transportation, food and all the other things we rely on.

Forecasts are not the same thing as guesses. They are informed to some degree. But they can’t be relied on like facts.

Facts don’t change. Forecasts, on the other hand, can go wrong and remain open to revision as the facts unfold independent of them.

Forecasts cannot be relied upon. Households might be feeling squeezed now. But it could be a lot worse this time next year.

  • Wait-and-see….

Bank of England governor, Mark Carney, knows the antidote to rising prices is a rise in interest rates. But he’s resistant to that idea right now.

He wants to take a wait-and-see approach. ‘You never overreact to a single data point,’ he told journalists last week.

For now, Carney can sit tight. Households must swallow higher prices and a round of belt tightening whilst he cogitates.

I think Carney wants to see if current price levels produce a reduction in consumer spending that leads to a natural fall in prices. That may be the case. But if prices continue to rise, Carney’s hand will be forced.

At the last meeting of the Monetary Policy Committee (which sets rates), Kristen Forbes voted for a hike. She was out-voted. But the ice may be broken now.

If prices continue to rise, more rate-setters might vote for a hike next time around – something that would take the heat out of the current situation, but which might produce myriad other problems for the pointy-heads to solve….

We must wait and see. But reports from the retail sector are worth monitoring as a gauge to what consumers are doing.

In the meantime, if you’re looking to get locked into a low-interest rate on a mortgage, now is the time to shop around.

If Mr. Carney puts up interest rates, the cheap deals currently available will swiftly disappear.

That’s how it looks from here….

I’ll be back with more next Tuesday morning.

All the best,

Dave Gibson

Money Truths