Why inflation is bad news for the high street
You’d expect the slump in the housing market to take its toll on the high street. And indeed it has.
Sofa retailers have been hammered. Anyone involved in selling ‘big ticket’ items, such as white goods (fridges, freezers, etc), has seen their share price tank too. Meanwhile, Homebase owner Home Retail Group warned that like-for-like sales at the home improvement chain had fallen 12% in the 13 weeks to May 31st.
But it’s also claiming some surprising victims. Carphone Warehouse took a pounding yesterday as it warned that broadband growth would be slower than it expected this year. Why? Because if you’re not moving house, there’s usually no impetus to go to all the hassle of changing your broadband provider.
But the property crash is far from being the only thing consumers have to worry about…
The house price boom has meant good times for retailers. Homeowners have been borrowing more money against the rising value of their homes (mortgage equity withdrawal), and then spending it on the high street.
But now that house prices are falling, the amount of equity left to withdraw is falling sharply. On top of this, lenders are now demanding that remortgagers have as much equity as possible in their homes, if they want to get decent rates on their home loans.
This can only be bad for the high street. Mortgage equity withdrawal fell from £13.7bn in the last quarter of 2006 to £7bn in the last quarter of 2007. Bear in mind that house price growth hadn’t even turned negative by that point. So MEW for the first half of this year will plunge again.
It’s not just about the amount of money people can borrow against their homes. It’s about confidence as well. Anyone who owns a home – even those with a reasonable equity cushion – is thinking: “how bad is this going to get? I’d better build up some savings, or pay a bit more towards the mortgage.”
And anyone who at some point in the last decade has said: “my home is my pension”, is now terrified that they will be spending their dotage living on baked beans and sleeping in soup kitchens. Suddenly that new widescreen plasma TV seems very much a luxury, not a necessity.
And they’re right to be worried. As Phil Dorgan of Panmure Gordon tells The Times: “The British consumer is more geared to house prices than almost any consumer in the world. There’s a high level of consumer debt as a proportion of GDP – if home prices fall it absolutely affects consumer spending and if we move into negative equity it will get even worse.”
All bad news. Hopefully if you’re a regular reader, you won’t be invested in any of the consumer-facing sectors (such as retailers) that have been battered in recent weeks. But even if you are, it’s not too late to get out – there’s plenty of scope for further falls.
Because, it’s not just about falling house prices anymore. Property prices may be tumbling, but the cost of everything else is going up. And consumers are very aware of it. The Bank of England’s quarterly inflation survey showed that the average consumer believes that annual inflation was at 4.9% in May. In February, they thought it was 3.9%. The Retail Price Index (RPI) shows that inflation is actually at 4.2%. And the official figure – the Consumer Price Index, which the Bank is meant to keep at 2% – is only at 3% so far.
This is a big worry for the Bank. For a start, it’s the highest that consumers have perceived inflation since it started conducting the survey in 1999. That’s no surprise really – the past nine years have seen China swamp the world with cheap goods, offsetting the central banks swamping the world with cheap money, so we haven’t seen inflation in all the places we’d normally expect to see it.
But now that we are seeing inflation rear its ugly head, the problem is that consumers will start to want more money from employers to compensate. Now the fact that the economy is heading into a downturn will offset some of that pressure – it’s not that easy to get a pay rise if you’ve got the threat of redundancy hanging over you – but it doesn’t simply mean it will go away.
The unions for one thing, have got their teeth into the idea, and not just in the public sector. The strike by drivers for oil giant Shell just goes to show what happens when you have a combination of weak government, a collapsing economy, and workers in positions of power.
But even if wage inflation doesn’t become an issue, the perception that life is becoming more expensive is even more bad news for the high street. If people are increasingly worried about stockpiling the necessities of life before they become even more costly, then they won’t be keeping money over to pay for luxuries.
That means all those second-line consumer-dependent stocks are also heading for trouble. The travel industry? Forget about it. This idea that they will somehow resist the downturn is laughable. Hotels, tour operators, airlines – I’d sell them all.
When the banking sector ran into trouble last year, the papers ran page after page of articles talking about how banks were an undervalued bet for ‘brave contrarians.’ All those ‘brave contrarians’ who bought the hype were then faced with collapsing rights issues and soaring mortgage arrears.
Expect to see similar articles about retail stocks. Just remember what happened with the banks, and ignore them.
At some point in the future, things will get better. At some point in the future, it’ll be time to go bargain hunting. But that’s a long way off from here.
Turning to the wider markets…
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UK shares turned upwards after a four day losing streak, as the FTSE 100 index recovered 1.2% with a 67 point gain to 5790. Banks rallied strongly, led by a near 10% recovery at HBOS which took the shares back above the 275p rights issue price. Royal Bank of Scotland joined in with an 8% pick up, while Standard Chartered put on 7%. Retailers, also in the doldrums recently, suffered again, with Home Retail and Kingfisher both slipping 4%, though there was a rally in housebuilders with Taylor Wimpey jumping 16%.
European markets also recovered, with the German Xetra Dax up 1% to 6715, though in Paris the French CAC 40 only added 0.2% to 4672.
Wall Street had bounced back as retail sales figures turned out better than expected, with the Dow Jones Industrial Average advancing 58 points to close 0.5% higher at 12142, while the wider S&P 500 nudged up 0.3% to 1340. The tech-heavy Nasdaq Composite also gained 0.4% to close at 2404.
Overnight in Asia, Japanese stocks rallied 0.6% as the Nikkei 225 added 85 points to end at 13973, but in Hong Kong, the Hang Seng declined 0.8% to 22833.
Brent spot was trading this morning at $136, while spot Gold was at $870. Silver was trading at $16.52 and Platinum was at $2038.
In the forex markets today, sterling was trading at 1.9435 against the US dollar and 126.17 against the euro. The dollar stood at 0.6491 against the euro and 107.95 against the Japanese yen.
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