Chief Economist’s Weekly Briefing – The long haul

Two weeks in and has the bad news poured in? Well not yet, but there’s plenty to be concerned about. Did the UK end 2022 with a recession? It may have just been averted (not so in NI). But the base case is it has only been delayed. What’s certain is that the cost-of living crisis is far from over, and borrowing costs will rise further before they come down. Businesses and mortgage owners, brace yourselves. The good news is the £600 energy vouchers for local households are in the post. But there’s still a long and bumpy ride left to run.

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Chief Economist’s Weekly Briefing – Autumn Austerity

Last week’s limelight was on Chancellor Hunt who delivered a much-awaited path for fiscal consolidation. While this should assuage financial market concerns and pressure on the BoE to tighten rates, households will be hit hard. Sure, the OBR seems optimistic about the pace of recovery but that won’t materialise anytime soon. Plus, energy bills will rise again in April. More tough times ahead.

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Bad medicine is what we need…

We’re well known in this part of the world for bemoaning the weather. But in recent times, it’s prices that we have been lamenting in our chit-chat with neighbours and in the pub. And that’s not surprising given the vast increases in the cost of things like gas and electricity that we have seen. To put this in context, if beer prices had increased at the same rate as gas, we’d now be paying about £40 a pint in some establishments.

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New era of household austerity awaits

We’ve heard lots of recent comparisons between today and 1976, given the heatwaves and drought that affected both years, and that 2022 is the UK’s driest year since. But whilst we have recently been basking in sunshine and dealing with the impact of the warm weather, it is the cost of heat, light and food for households this winter that should be on all of our minds.

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Sharper fall in activity as price pressures hit demand

Today sees the release of July data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – signalled that declines in customer demand amid strong inflationary pressures led to further sharp reductions in output and new orders in the Northern Ireland private sector. Rates of inflation remained elevated over the month, despite showing signs of easing. The main positive from the latest survey was a further rise in employment.

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Ulster Bank Ulster Fry Index at highest since 2014 

The annual Ulster Bank Ulster Fry Index shows that the price of all items making up the cooked breakfast gauge rose in the year to the end of February, using the UK Retail Price Index (RPI). 

Milk saw the biggest price increase in the index with a rise of 16.7% in the 12-months. There were also strong rises in the prices of a range of other items including eggs (8.2%), butter (6%), mushrooms (7.1%), bread (5.6%) and sausages (4.3%). 

English breakfast with bacon, sausage, fried egg, baked beans and tea or orange juice
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UK inflation hits a 30-year high

The annual pace of UK CPI inflation accelerated from 5.1% in November to 5.4% in December representing the highest rate since March 1992 (+7.1% y/y).  UK inflation had peaked at 8.4% in April and June of 1991. Consumer goods inflation (+6.9% y/y) is running at twice the rate of consumer services inflation and is at its highest rate since July 1991 (+7.0% y/y). Goods inflation is expected to breach its record high of 7.4% y/y  (Sep/Oct-90) in the coming weeks. Consumer services inflation (+3.4% y/y) remains more subdued by comparison and is at an eight-and-a-half-year high. By comparison, consumer services inflation was running into double-digits in late-1990 and 1991 and peaked at 12.1% in April 1991.  Services inflation will be closely watched in the coming months as the strength of pay settlements will feed into this measure. Wage increases will also filter through into the cost of consumer goods.  

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UK inflation poised to hit a 30-year high

The annual pace of UK CPI inflation jumped from 4.2% in October to 5.1% in November representing the highest rate in over a decade. That also means the UK’s inflation rate now exceeds the unemployment rate.  No economist foresaw that scenario at the start of 2021. Last month’s reading was stronger than expected with the Bank of England previously not expecting a breach above 5% previously until early next year. The latest inflationary news coupled with yesterday’s strong labour market data will make for an uncomfortable Monetary Policy Committee (MPC) meeting tomorrow.  

Until the arrival of the Omicron variant, the MPC were expected to raise interest rates by 15bps from the record low of 0.1% to 0.25% at tomorrow’s MPC meeting. This would mark the first December interest rate rise since 1994. However, the new added layer of uncertainty stemming from the Omicron variant has led economists to row back on expectations to increase rates until early in the new year. Indeed, in recent days some of those MPC members already voting for a rate hike in previous meetings have signalled that they may have to wait a bit longer. Yesterday the IMF said the Bank of England needed to increase interest rates now to prevent inflation from becoming ingrained and fuelling increases in wage demands. 

Increases in prices of petrol and second-hand cars were the key drivers of the latest surge in inflation.  However, price rises were broad-based across goods and services.  Consumer price inflation was as low as 0.4% y/y in February of this year and is now expected to peak closer to 6% than 5% in Spring 2022.  Any reading above 5.2% (which occurred on Sep-08 and Sep-11) will represent the highest reading since March 1992 (+7.1% y/y). So we are poised to see consumer price inflation hit a 30-year high in the coming weeks while the Bank of England’s Bank Rate (currently) remains at a record low.  

It is worth remembering that September’s CPI rate (3.1% y/y) is used to set the increase in welfare benefits, such as Universal Credit payments.  Similarly the majority of people working are unlikely to see wages keep up with inflation and will also see a fall in their standard of living. Clearly those that can least afford it will experience the biggest squeeze in their cost of living.  Inflation will be just one part of this squeeze, with tax rises the other. National Insurance Contributions are set to rise by 1.25 percentage points next April while income tax thresholds will be frozen for 4-years. The cost of living crisis is set to be the dominant economic story in 2022.

Selected items y/y inflation rates in November 2021

  • Consumer goods 6.5%
  • Consumer services 3.3%
  • Food 2.4%
  • Clothing 3.8%
  • Electricity 18.8%
  • Gas 28.1%
  • Liquid fuels (home heating oil) 85.3% 
  • Petrol 29.5%
  • Diesel 27.5%
  • Furniture and furnishings 11.7%
  • 2nd-hand cars 27.1%
  • Bicycles 15%
  • Articles for babies 15.2%