September is traditionally the month that, much to the irritation of many shoppers, sees supermarkets and other retailers start selling Christmas decorations. A few even go so far as to start playing some festive tunes.
I really didn’t understand why until someone pointed out that September marks three paydays until Christmas. Giving anyone on a budget the opportunity to spread the cost over several months instead of taking a big hit in November/December.
So, the news that the consumer price index measure of inflation surged to 3.2% in August will not be warmly welcomed. It is the biggest increase since the index started in 1997 and more than had been expected.
So what?
Inflation – much like Brexit – has become a word that cannot be escaped… no matter how much you try. It is ever-present, referenced in pretty much every press release sent in the past six months.
A lot of the commentary has been around predictions, expectations and multi-factored ‘guess-timations’.
But it has significant implications, and its effects are being compounded by Brexit (see, there is that word again).
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said that inflation “was given a significant shove by the Eat Out to Help Out scheme discounts a year earlier, which will drop out of the figures next month”.
“However, much of this enormous jump is powered by the same alarming imbalance between supply and demand that has seen yawning gaps open up on the supermarket shelves.
“It spells trouble for shoppers, savers and the broader economy.”
For the want of a nail…
There remains significant confusion about the import/export process between the UK and the European Union. The length of time it takes to transport goods from one side of the English Channel to the other is really anyone’s guess. But it isn’t quick.
Let’s not even venture into the Northern Ireland element of the equation and what the future holds there.
The UK is facing a chronic heavy goods vehicle (HGV) driver shortage and also a labour shortage. The situation is less dire for non-perishable items, but food production is facing a troubling autumn and winter. The furlough scheme is set to come to an end soon, but British food producers have long struggled to find enough local workers.
Who doesn’t love a Christmas roast potato?
But a labour shortage means the potato wasn’t harvested in time and rotted in the ground.
Or it was harvested but couldn’t be transported to the wholesaler because no HGVs were available.
So, supply/demand economics dictate that what is available in the supermarket becomes more expensive.
And that’s just looking at the domestic food production industry – never mind the potatoes coming from Europe that were stuck at customs and now look a bit past their best.
In an interview with the BBC on Wednesday, a fish wholesaler who imports from Europe said the price of one container has risen from £3,000 to £14,000 ($19,382, €16,404). A cost that will have to be passed on to restaurants and, ultimately, diners.
So, those European potatoes are not only a bit on the older side but are also now considerably more expensive.
And that’s just food.
Hargreave’s Coles said that “0.4 percentage points of the rise is an artificial blip” caused by chancellor Rishi Sunak’s Eat Out scheme, but she warned that “other changes look set to stick around”.
Petrol prices last year were 113.1 pence per litre, now sit at 134.6 pence – their highest level in eight years.
Add that to the cost of transporting goods around the country and across the channel.
All of this spells troubling times for smaller businesses, which have also just been hit with a dividend tax and higher national insurance contributions to pay for social care.
More to come?
The measures taken by the chancellor to manage the pandemic and keep the economy running are undoubtedly having an impact on the figures.
Much like the pensions triple lock debate of last week, the more than 8% rise in earnings was a freak occurrence driven by annual changes in very unusual figures/circumstances.
Coles added: “The Bank of England (BoE) expects [inflation] to hit 4% towards the end of 2021 and then drop, as the impact of the first lockdown and supply bottlenecks drops out of the figures.
“However, some of these trends aren’t going anywhere fast, and with warnings of prices rising and supply chains creaking, there’s a risk some of this inflation is here to stay.
“There’s also the chance of possible wage rises as vacancies hit records highs, and when price and wages feed into one another, the only way is up for inflation.”
Add to that rising energy prices… an industry that is known for being very quick to increase prices but not quite so prompt at reducing them.
What to do, what to do?
Scott Spencer, investment manager in the multi-manager team at BMO Global Asset Management, said: “It’s undeniable that markets are worried. If inflation persists, it could spur the BoE to lift interest rates to quell rampant economic growth. The concerns are not new, but investor unease is the highest it has been for around 15 years.
“In broad-brush terms, rising inflation tends to be seen as bad news for markets. For equities, it can make it harder for companies to increase their earnings growth and, with bonds, it can make the securities that investors hold feel less valuable. If interest rates go up, it makes the returns available on newly issued bonds look more attractive.”
Describing the situation as “nuanced”, Spencer says the “argument that rising inflation levels are transitory is winning the day”.
But that doesn’t necessarily mean good news for savers, said Matthew Roche, associate investment director at Killik & Co.
“Even if inflation does stabilise or drop back, there is likely to still be a significant gulf between the interest rates available on savings accounts and inflation. This will continue to leave traditional cash savers worse off as the purchasing power of their savings will erode over time.
“As such, those cash savers who are able to take a long-term view should consider investing their savings. Broad based portfolios with investments across global equities, corporate bonds and alternative funds offer the potential for more income than available via bank accounts.
“In addition, history suggests, that such portfolios should also deliver higher average annual total returns over time, thus helping to insulate savings from inflation.”
Raising interest rates could be a route the Bank of England takes to rein in rising inflation. But that’s not a guarantee if it does, in fact, turn out to be transitory.
As with any major economic developments it is an opportunity for financial advisers to talk to their clients. Perhaps prioritising those sitting with considerable cash savings.
