Inflation has soared again in April and the UK now has the highest rate of inflation in the G7. European as well as UK households are enduring a cost-of-living crisis; and for the UK the situation is set to worsen in October when energy price cap is expected to be raised again. In the meantime, the global food system is under threat due to the war. Wheat prices surged further, after India – the world’s second largest producer – said it would suspend exports. Hadly surprising then that the mood is darkening.
40-year high. 1982 saw the introduction of the CD, the Ford Sierra, the Sinclair Spectrum and Commodore 64. Bucks Fizz and Shakin Stevens topped the charts and ET and Rocky 3 were movie hits. 1982 was also the last time UK CPI inflation was higher than its current rate of 9%. April’s inflation rate is almost double what the BoE forecast six months ago. The 54% increase in the energy price cap (which will be raised again in October) accounted for three quarters of the rise in the inflation rate last month. Food prices (up 6.7%) are rising at their fastest pace in almost 13 years and as Governor Bailey warned are set to push higher. 2022 inflation is not a good look.
Apocalypse now? Bank of England Governor Andrew Bailey was giving testimony to Parliament last week, explaining why inflation is more than four times higher than its target. He maintained that the Monetary Policy Committed was largely powerless to prevent the surge in costs driven by global factors and that earlier or faster interest rate rises would likely have just meant fewer jobs and less growth. But it was his comments around the future risks posed by food shortages from the continuing war in Ukraine that really grabbed attention as he struggled to sound anything other than apocalyptic in describing the potential impacts. A sentiment echoed by the UN Secretary General in his call for a ceasefire.
Red Hot. UK’s unemployment eased to 3.7% in Q1’22 vs 4.1% in Q4’21, the lowest level since 1974. This was supported by quarterly increase in employment alongside a contracting workforce. For the first time on record there were fewer people out of work than there were job openings! Meanwhile, employers appear to be responding to labour shortages by giving large one-off bonuses rather than raising core wages. Total pay including bonusses was still outpacing inflation with annual growth of 7% up from 5.6% in February. However, growth in regular pay excl. bonuses rose to 4.2%, from 4.1% in February equivalent to a real terms fall of 1.2%. Thus, while the market had a knee jerk reaction of upping its rate expectations for the year end, the Bank of England is unlikely to hit the panic button just yet.
How low can it go? Northern Ireland’s unemployment rate fell to 2.3% in Q1’22 – its joint-lowest rate on record. That rate of unemployment may make for a great headline but it doesn’t make for a great labour market. Redundancies remain almost non-existent and skills shortages are evident the length and breadth of the economy. HMRC payrolls hit a fresh record high of 774,600 in April and wages increased by 7.1% y/y during the same month. The local labour market is characterised by what could be termed ‘peak job security’ yet from a cost of living perspective even the gainfully employed are approaching peak insecurity.
Booze and Cigarettes. Partially reversing declines in the previous two months and well above the consensus (- 0.3%), UK retail sales volumes rose by 1.4% MoM in April as shopper’s responded to real income squeeze by partying at home/not going out. Food store sales rose 2.8% MoM mostly because of higher spending in alcohol, tobacco, and sweet treats. Clothing sales also performed strong, especially online with online retailers registering an increase of 3.7% in April. April’s recovery suggests that households are willing to utilise their savings and credit cards to defend their spending. Despite April’s strong resilience the trend looks slightly downward; volumes fell by 0.3% on a three-month-to-three-month basis while May’s data will reveal the full impact on households’ incomes from tax rises and surging energy bills.
Rabbit hole. Belts are tightening in response to the march of inflation. Waning consumer confidence is evident across several sectors. In the second week of May, UK credit and debit card purchases decreased by 6 ppts compared to previous week, OpenTable seated diners fell by 10 ppts while visits to “retail and recreation” plummeted by 3%. However, the fall was to some extent expected given that comparisons are made with the previous week that includes the May bank holiday. The fall in consumer confidence is another worrying sing; GfK’s composite index has dropped to its lowest level ( -40 vs. -38 in April) in May suggesting that households will be very cautious. As inflation continues to eat away at people’s spending power and mire business performance, the outlook is set to worsen in the coming months.
Quelle surprise. No prizes for guessing what’s topping businesses’ worry list this month. That’s right: 26% of firms list rising input costs as their no.1 concern right now, with another 20% flagging higher energy prices. Global supply chain disruptions continue to pose not-unrelated challenges too, affecting 1 in 5 firms. Added to which, businesses are grappling with ongoing worker shortages, especially those in the hospitality trade where 1/3 are missing staff. More evidence, if needed, that the stagflationary environment is causing headaches for bosses as well as workers.
Nice and easy. It looks like the UK housing market has finally reached its peak! Property prices increased by 9.8% over the year to March, down from 11.3% in February. The levelling has been attributed to base effects as house prices leapt by 1.6% in March 2021. March’s figure marks the first deterioration since the Stamp Duty Land Tax threshold returned to £125K, from £250K, in October. Rising interest rates and the squeeze on household incomes will likely weight on housing activity and price growth as the year progresses. Fortunately, this may provide some breathing space for new house buyers, who may be feeling the strain from a swollen housing market.
Still going. Following a pause in growth in during the fourth quarter of last year, NI’s residential property prices continued their ascent northwards in Q1. The latest 3.4% q/q rise took the residential property price index to a 14.5 year high with a median property price of £164,590. On a year-on-year basis prices are up over 10% which is in line with the UK but below the 15% y/y increase in the Republic of Ireland. Prices are up but the number of completed dwellings is falling. The latest Q4 and Q1 house completions were the lowest for the respective quarters in five years. Supply chain difficulties and building material inflation are hitting supply. That will support prices while the cost-of-living crisis weighs on affordability / demand.
Productive. In the first quarter, output per hour was 1.9% higher than pre-Covid levels. These gains were consistent with pre-Covid trends, suggesting no discernible impacts of Covid. While productivity fell by 0.8% vs previous quarter, it was explained by ‘industry reallocation’ i.e., less productive industries being back in action. All four broad sectors saw an increase in productivity, mainly due to lower hours worked. Output per person too gained for the fourth consecutive month and was 1.6% higher vs. pre-Covid levels. Sectors like hospitality, transport and agriculture saw large productivity gains, suggesting that firms are learning to deal with a tighter labour market.