The upheaval in the Middle East was sparked by soaring food prices, partly fuelled by loose Western monetary policy. In turn, the Middle East has thrown inflation right back at us, in the form of higher oil prices.
This has many implications. But I just want to focus on the British consumer for today. The fact is that life is getting ever more expensive, while wages aren’t rising to match. Retailers have really started feeling the impact since Christmas, as cheap clothing chain Primark revealed yesterday.
And the trouble is, the Bank of England can’t come to the rescue this time as it did in 2008/09.
Indeed, it may even add to the problem.
Even cheap clothes are getting harder to sell
Cheap clothing chain Primark has seen sales growth slow sharply since Christmas. The company is owned by food producer Associated British Foods. ABF finance director John Bason said: “There’s been a noticeable slowing down since the new year. I think people are thinking ‘I’m being squeezed here’ and being more cautious as a result”.
Now Primark has hardly fallen on hard times. Like-for-like sales growth is still rising at a 3% clip – “but that’s a long way shy of recent progress”, as the London Evening Standard put it. And as Darren Shirley at Shore Capital told the paper, it doesn’t bode well for the retail sector as a whole. “Demand seems to have been especially poor since February… From opposite ends of the retail spectrum, Primark and John Lewis are recording tough trade and they are both best in class”.
So why the sudden slowdown? Well, forget all the talk about it all being down to fear of ‘the cuts’. The way these things are written up in the papers, it often sounds as though we’d all be fine if we could just cheer up and spend – it’s all about some vague ‘feel-good’ factor.
But it’s not about confidence. It’s about something far more tangible. Yes, people may well be worried about ‘the cuts’. They might also be worried about World War Three breaking out in the Middle East. And they’re probably worried about global warming too. People worry about lots of things, all the time.
But when it comes to what actually affects their spending, the answer is very simple – it’s about the amount of money they have or expect to have in the future. And right now, consumers have less money. Their cost of living is rising more rapidly than their salaries. The interest on their savings is negligible. And unfortunately, there’s no respite in sight.
The price of ‘needs’ just keeps rising
A ‘senior Treasury official’, quoted by Rachel Sylvester in The Times today, sums it up: “The retailers have what they call ‘known price items’ – the few things that people can remember the cost of. Fuel is the most known price item of all because the price is up there on the board in every petrol station you drive past”.
As Sylvester notes, the price of petrol has gone up to an average of £1.30 a litre. Retailers reckon it will rise to £1.40 over the next few months. I suspect that we won’t see the planned rise in fuel duty go ahead in April, and Sylvester suggests there are plans for a ‘stabiliser’ – whereby petrol tax falls when the oil price rises and vice versa. But that will still leave prices at historically high levels.
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On top of that, analysts at UBS reckon that food price inflation is higher in Britain than in most other economies. “The UK food retail system is demonstrably passing on higher prices than are the food retail systems of other countries.”
There’s no easy way out for consumers
In 2008 and 2009, the carnage wrought by the collapse of the banks was offset by both home loan and commodity costs plunging. As several people pointed out, including the ill-fated Lord Young, if you had a big home loan, commuted by car, and managed to hold on to your job through the crisis, then chances are you’d never had it so good.
Indeed, the Financial Services Authority reckons that borrowers have had the equivalent of a “£20bn annual windfall” due to lower rates. But all this has done is leave people all the more vulnerable to rate hikes. Incredibly, high loan-to-income ratio home loans now account for as large a share of the market as at the pre-crisis peak.
This massive rate-cutting bonus can’t be repeated, even if the Bank wanted to. Interest rates can’t go any lower, so there’s no way to boost consumer income via lower home loan payments. Short of printing money to repay people’s home loans, the Bank can’t do anything more on this front.
And while I wouldn’t completely rule out a crash in commodity prices, the only way that’s going to happen is if either China goes into economic meltdown, or the financial system dries up again. If those scenarios come true, we’ll have a lot more to worry about than the cost of filling up our cars.
What does all this mean? Consumers are going to face the squeeze this year, one way or another. Even if wages pick up (unlikely as it seems), then the Bank of England will be forced to raise interest rates more rapidly than it had planned. That’s bad news for consumer-facing stocks, from retailers to airlines. And it’s yet another argument for sticking with more defensive stocks that sell goods that consumers are less likely to cut back on.
And of course, there’s the oil sector. We’ll be looking at the potential impact of the rising oil price, and ways to play it, in the next issue of MoneyWeek magazine, out on Friday. If you’re not already a subscriber, subscribe to MoneyWeek magazine.