Ear to the Ground

May 19 2022

Inflation again took centre stage in the UK this week, with the annual CPI inflation rate jumping to 9% in April, the highest level since 1982. Month on month inflation rose by 2.5%, with the key contributor being housing and household services, with cost of renting, mortgages and household bills all on the rise.

The rate of increase in gas and electricity prices is now at the highest level seen since at least 1989, with a 12 month rate of 70%.

We have often argued that the inflation rate for one person is not the same for another and this has been highlighted in research conducted by the Institute for Fiscal Studies. Inflation for the poorest decile by income stands at an eyewatering 10.9% whereas for the richest decile the inflation rate is calculated at 7.9%, a 3% difference. Some of this can be attributed to higher energy prices disproportionately hitting poorer households. Calculations show that the poorest households, by income, spend 11% of their total household budget on gas and electricity, compared to 4% for the richest households.

There may yet be worse to come, however. Quoting Heidi Karjalainen, “Continuing pressures, such as the war in Ukraine, are likely to push Ofgem’s October tariff cap, as well as other prices including food prices, even higher later this year. We are likely to be in a prolonged period during which poorer households are facing rates of inflation even higher than the headline figures would suggest.” For this reason, the UK consumer is becoming increasingly nervous about large expensive purchases. The latest GfK index stands at one of its lowest levels going back to 1996.

I guess the one saving grace is that, for now, there appears to still be a strong element of job security, with the unemployment rate remaining low at 3.7%. Average earnings continue to grow, at 7% including bonuses, 4.2% excluding, but as we can see, both rates are some way behind the rise in the cost of living.

It is not just the UK where we are starting to see weakness. This week we saw Walmart’s share price fall by their largest one day drop since 1987 after the company cuts its forward guidance. The latest quarterly figures showed that profits had taken an unexpected hit due to higher wages, a jump in fuel costs and softness in general merchandise sales in its US business. This took the market by surprise given that the company is typically one of the less volatile consumer staple stocks. It is, however, also regarded as a bellwether for the strength of the US consumer and the softness in sales was not taken lightly.

They were not the only one to suffer however, with retail giant Target also posting disappointing figures. The company reported a 52% drop in profit for the first quarter, blaming higher expenses, supply chain disruptions and consumers holding back on non-essential purchases.

The higher cost of living is clearly having an adverse impact on the consumer. In the UK and US, where consumption is such a large part of the economy, that is a big deal.

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