Tuesday 14th February 2017
Brace yourself! This might hurt….
It is St. Valentine’s Day. We associate this day with roses and chocolates. Also with Al Capone’s massacre of gangland rivals in Chicago in 1929….
What will it be today? A candle-lit dinner for two? Or bullets and tears at bedtime?
Both are key official measures of inflation….
The CPI measures changes in the prices of consumer goods and services bought by households….
The PPI measures the average changes in prices received by domestic producers for their output….
Both measures are expected to show that prices are rising – fast.
Ahead of today’s announcements, British households were being primed for a sustained squeeze on finances….
- The only way is up….
This prediction from Saturday’s Telegraph:
‘Inflation jumps in January as vegetable shortages set to push up prices further….’
We reckon they’re onto a winner with this one….
A cold-snap across Europe has produced a shortage of lettuce, tomatoes, courgettes and other seasonal vegetables. Shelves in the vegetable aisles of the supermarkets have been empty.
Food processors haven’t been able to get what they need either….
What produce has been available has surged in price – helping accelerate the inflation rate.
Higher prices at the petrol pump will play a part too. The cost of fuel rose 3.5% in January.
This morning markets expect to hear that inflation has hit a 3-year-high and reached 2% for the first time since December 2013.
We don’t expect the upward drift to halt there. We expect more rises still….
- The signposts point one way only….
Prices are lifting off and heading for the clouds. This balloon can go no other way.
Supermarket price wars served to keep food prices down over Christmas and into the new year.
But in-fighting between retailers is unlikely to continue. The weekly shop is set to cost more going forward….
The weakening pound continues to push-up import costs – additional expense that producers will readily pass on to consumers….
Price hikes introduced by energy companies will play out in future CPI and PPI figures….
Everything we consume must be made, grown or sourced elsewhere. When the costs of commodities, production, shipping and distribution increase – the price of the end-product rises too.
It’s a vicious circle. The end-user – the hard-pressed householder and consumer – always gets stuck with the bill. You can rely on it. The cards are marked.
- Penny-wise – the new watchword….
Everything will cost more than it did.
Household incomes will need to stretch further and last longer. Times will be tougher. They might get tougher still.
Budgets must be trimmed of fat. Belts must be tightened. The little luxuries must be sacrificed. Living standards will fall….
Watch out for a run on ‘mend & make-do’ stories in the press. We predict a rash of thrift guides on the bookshelves of supermarkets over the summer as publishers seek to cash-in on a nationwide frugality drive….
The market for advice on making pennies work harder and smarter will swell in the months ahead….
We don’t know how much more expensive things will get. We don’t know how difficult it will become for families to make ends meet. Some will cope better than others.
All we know is that rising prices are a given for the foreseeable future.
- How high might this balloon float?
In 2015 the inflation rate had flattened out to almost nothing. Prices were steady. Now they are rising again – steeply.
How high will they go? Nobody knows. The future can’t be foretold. Not with any certainty.
In the absence of certain facts, we turn to experts and forecasters for a steer….
The Bank of England believes inflation will peak at 2.8% in 2018 and then stay above 2% for the remainder of the decade….
Panmure Gordon’s David Buik believes inflation will hit 2.7% by December….
Howard Archer, chief economist at IHS Global Insight, expects the rate to be at 3% by December….
The EY Item Club, a think tank, reckons the rate will soar to 3% as early as April….
Nobody is saying prices will go down. Nobody is saying the rate of inflation will fall any time soon.
Contrarian as we are, we won’t be doing so either. Prices are going up. Living standards are coming down. That’s how we see it.
Figures produced by the Office for National Statistics say wages had risen more quickly than prices since mid-2014.
Now, as prices put on a spurt, new forecasts suggest wage growth has stalled. Some analysts believe wage growth is about to regress….
The effect will be to deliver a double-punch to the guts of the man-on-the-street. Stagnant or falling incomings + rising outgoings = lower standards of living and a lot of unhappy campers….
- What can be done?
The man-on-the-street cannot produce or effect any big-picture change….
He must simply accept that he is hostage to bigger economic forces, grit his teeth and make the best of it.
He can spend a little less. He can do what he can to earn a little more. Or he can do nothing and brace himself for the punishment higher prices will inflict on his existing budget.
Those calls are under his jurisdiction. But he can only work on that micro-picture. The macro-picture will not yield to his fine-tuning.
The macro-picture is the preserve of the planners and the pointy-heads at the top of the tree – the likes of Mr. Mark Carney at the Bank of England….
- A disconnect between ‘us’ and ‘them’….
The bank could take hot air from the balloon by increasing interest rates.
As interest rates increase, consumers have less to spend. With less spending, the economy slows and inflation decreases. For the man-on-the-street, it amounts to this:
He can have low interest rates, more to spend and higher prices. Or higher interest rates, less money to spend and lower prices.
What’s the best option? I don’t know. This conundrum calls for a better man than me.
All I know is that whilst inflation is a negative for the man-on-the-street, to economic planners it is something of a positive.
To economists, inflation helps drive growth – the lack of which has bedeviled major economies since the global financial crisis of 2008.
The people who manage these things will want to preserve those green shoots – whatever the cost to you or me.
What you and I think – or how we might be affected – doesn’t count for much. We are not much represented in the equation.
- Brace yourself for more of the hurt game….
Mr. Carney’s inflation target has been set at 2% for some time.
And he’s on record saying he sees inflation steadying between 2% and 2.8% for the remainder of the decade.
We’re only just entering that territory. Mr. Carney will have no plans to turn around at passport control. He will have no intention of raising interest rates. He’ll want to stay in this new country for a while. To stick around and see how the land lies. To see how things might pan out.
Don’t get me wrong. He won’t want inflation to get out of control. He might have to raise interest rates if rising prices start to strain at the leash. But that’s a consideration for the future….
For now, British households must soak up a little pain. The cost of living will continue to rise.
Inflation delivers growth. The perceived needs of the wider economy will come first – however much it hurts the average householder.
That’s how it looks from here….
I’ll be back with more next Tuesday morning.
All the best,