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With almost mind-numbing predictability, retail sales failed to hit analysts‘ expectations last month.
Official figures showed that high street sales in July fell 0.3% on the previous month, while June‘s 0.9% rise was revised down to 0.7%.
A 3.4% drop in household goods sales was the main culprit, as the market for high-tech TVs dried up. That, of course, was because most people upgraded their telly before the World Cup, effectively stealing sales from later in the year. After all, as we’ve pointed out on several occasions, you don’t need to replace your TV every month, regardless of how much of a technology fiend you are.
The instant reaction of most pundits was to declare that the weak figure means there will be no further interest rate rises this year. But another piece of bad news for consumers will have the Bank of England nervous…
In the absence of the World Cup effect, it seems that retail sales have returned to their downward trend. It’s no surprise. Consumers are under pressure from rising taxes, rising bills and rising interest rates. And the pressure is only going to get worse.
Yesterday, PowerGen said it is raising electricity and gas bills for the second time this year. From next week, gas bills will rise by 18%, while electricity goes up by 10%.
The London Evening Standard reports that it’s the 12th double-digit rise this year from power companies. “Every major supplier in the UK has imposed two rounds of price increases this year.“ Powergen customers have now seen their energy bills double in just three years, said consumer watchdog Energywatch’s Adam Scorer, and the same goes for customers of most other energy companies.”
The soaring price of energy is just one of the inflation worries facing the Bank of England. Most pundits have still been taking comfort in the absence of ‘second-round’ effects – such as rising wages. But this could now be changing.
Earlier this week, official statistics showed that the number of unemployed rolled relentlessly higher in July, with the number of people out of work and claiming benefits rising by 2,000 to 957,000. The unemployment rate, measured from April to June, rose to 5.5%, the highest level in six years.
Rising unemployment is not normally conducive to rising inflation. If people are concerned that they might lose their jobs, they don’t tend to ask for higher wages.
But wages are rising regardless. Average earnings rose by 4.3% year-on-year in July, compared to 4.1% in June. The Bank of England tends to view 4.5% as being the top of its comfort zone.
“If earnings continue to creep up, the odds of another interest rate hike before the end of the year will become ever more likely,” Global Insight’s Howard Archer told the BBC.
So why are wages rising? And what kept them low in the first place?
One problem is the fact that a significant number of pupils manage to go through our education system without ever learning to read or count. Employers keep complaining about the lack of basic skills endemic among UK school leavers. That means that skilled workers can command a premium. In other words, there may not be a shortage of unemployed people – but there is a shortage of people worth employing. It doesn’t matter if 100 or 1,000 people are available for work – if you are the only person who can do the job, you can command whatever salary the firm is willing to pay..
The other problem is that the labour market is imbalanced. On the one hand you have the manufacturing sector which has seen staffing levels slashed to the bone, with wage hikes correspondingly low (at least until recently). But all those manufacturing jobs have been replaced and more by public sector jobs, funded by private-sector taxpayers.
Although economists talk about wage inflation being low, the truth is that public sector staff, who represent the most militant sector in the workforce, have been kept happy by way-above-inflation salary hikes in recent years. This has been offset by weak wage inflation in other parts of the economy – like manufacturing.
The wealth effect of rising house prices should also not be underestimated in curbing demand for higher wages. Demanding a pay rise from your boss is not a conversation that most people enjoy having, particularly in the largely non-unionised private sector. If they can subsidise their rising cost of living by borrowing against the value of their house rather than demanding more wages, many people will take the easy route.
But now, Gordon Brown is trying to rein in public sector wage hikes – how co-operative the unions will be remains to be seen. At the same time, there’s a new boom in the financial services industry, which is driving wages higher in that area. And house prices are no longer seeing double-digit gains, sapping the feel-good effect. If the house will no longer provide, then individuals may have to steel themselves to confront the boss and demand higher wages to compensate…
So we certainly wouldn‘t discount the possibility of second-round inflation yet – and we doubt the Bank will either.
Turning to the stock markets…
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The FTSE 100 closed just 3 points higher yesterday, ending the day dead on 5,900. Companies reliant on oil for fuel were boosted as the crude price continued to fall towards $70 a barrel, making cruise operator Carnival the biggest gainer of the day. Continuing strength in the resources sector also improved sentiment. Miners Vedanta, BHP Billiton and Lonmin were all helped by strong commodities prices. Carling lager producer SABMiller was the biggest faller of the day following a negative broker’s report. For a full market report, see: London market close
Across the Channel, the German Dax-30 closed 20 points higher at 5,833. In Paris, the CAC-40 closed edged 7 points higher to 5,144, but oil giant Total fell due to the lower price of crude.
On Wall Street, stocks ended higher for the fourth day in a row, boosted by strong results from Hewlett-Packard. The Dow Jones climbed 7 points to 11,334. The Nasdaq was 8 points higher to end the day at 2,157, and the S&P 500 closed 2 points higher at 1,297. The index of leading economic indicators for July suggested that growth was slowing, prompting hopes that there would be no further interest rate rises from the Fed.
In Asia, the Nikkei 225 closed the day 85 points higher at 16,105.
The price of crude oil continued its descent towards $70 a barrel yesterday, but rose slightly to $70.42 in New York this morning. Brent spot was trading at $71.24 in London.
Spot gold fell as low as $611.90 an ounce yesterday, and was trading at $614.10 late in New York. Silver was also lower, edging down to £11.90 an ounce.
In London this morning, news that Britain is to supply 72 fighter planes to Saudi Arabia boosted BAE Systems in early deals. WPP – the second-largest advertising and marketing company in the world – announced pre-tax first half profits of £287m, a 30% increase. The company announced that the British market had stabilised, albeit with low levels of growth, and prospects for future improvements in its performance ‘remain good’. WPP has been making acquisitions in the fast-growing Chinese market ahead of the Beijing Olympics. And in other media news, Virgin Radio owner SMG revealed that it had received a merger proposal from broadcaster Ulster Television. Under the terms of the proposal, SMG shareholders would receive a 50% interest in the merged entity.
And our two recommended articles for today…
What does the US rate freeze mean for gold?
– The Fed’s decision to stop raising interest rates demonstrates a change in priorities, from fighting inflation to avoiding recession, says James Turk of goldmoney.com. That could be bad news for the dollar, but good news for gold and silver. To find out why you should be investing in these precious metals now, read: What does the US rate freeze mean for gold?
Inflation – why it’s different this time
– As house prices rise to unsustainable levels, we are once again being warned of the threat of runaway inflation. But it’s a very different environment to that of the 1970s – not least because of the ‘Chindia factor’ -and the outcome could be very different too, say John Robson & Andrew Selsby of RH Asset Management. Could it even be deflation which is the greater threat? To find out whether central banks can cut off the supply of cheap credit without causing too much pain, see: Inflation – why it’s different this time