The Bank of England’s chief economist has admitted that the central bank faces its toughest challenge since independence in 1997, and signalled that interest rates need to rise further.
Speaking in Cardiff this morning, Huw Pill said that inflation’s surge to a 40-year high of 9% in April put him in a “very uncomfortable situation”, given the Bank is meant to keep inflation around 2%.
But Pill says this discomfort is ‘as nothing’ compared to the challenges facing poorer familier who are most hit by the current cost of living crisis.
These are difficult times for many people, especially for the less well off, who spend a higher proportion of their income on energy and food, where recent price rises have been most significant.
Current challenges are thus a salutary reminder of the importance of price stability as an anchor for wider economic stability, and a bulwark to sustaining people’s livelihoods, especially for those on lower pay and fixed incomes.
Pill explains that the Bank’s most recent inflation forecast “does not make for pretty reading”, with inflation expected to rise over 10% by the end of the year.
That’s why the Monetary Policy Committee voted to raise interest rates to 1% this month.
And Pill gives a clear sign that interest rates will need to rise further, as the Bank walks a ‘narrow path’. Underlying wage growth is currently strong, he says, but rising inflation will hit disposable incomes, slowing the economy.
On the one hand, headline inflation is clearly too high, the UK labour market is tight, wages are growing at stronger rates than would normally be deemed consistent with the inflation target, and business confidence is resilient, in part in anticipation of being able to re-establish profit margins. In short, inflationary momentum in the UK is currently strong.
On the other hand, significant increases in international energy, food and goods prices over the past year imply a substantial squeeze in UK residents’ real incomes, which will weigh on future demand and employment. Looking beyond the shorter term, UK inflation is set to fall as global commodity prices stabilise, bottlenecks in global supply chains ease, and domestic inflationary pressure dissipates as the real income squeeze opens up a margin of economic slack.
Pill says the Bank must avoid “self-sustaining, expectationally-driven” price rises -taking hold (where current high inflation drives up expectations for wages and prices)
He concludes by saying inflation is now the biggest challence since the Bank of England was given responsibility for setting interest rates, 25 years ago this month.
That celebration has come at a testing time for UK monetary policy, for the reasons I have outlined in my remarks today. With inflation forecast to rise into double digits following the very sharp rise in international energy and goods prices, this is biggest challenge the MPC has faced over the past quarter of a century.
It is in these testing times that the anchor represented by the 2% inflation target comes to the fore. Supported by the independence accorded to the MPC to pursue that target, we are able to take the sometimes tough decisions to bring inflation back to 2% and keep it there sustainably.
It is that commitment that has led me to support a tightening of monetary policy since I joined the Committee last September, and to signal today that this tightening still has further to run.
David Muir, a senior economist at Moody’s Analytics, warns retail sales will come under more pressure this year:
“Despite the sharp rise in utility bills, retail sales rose 1.4% in April. But with price pressure set to persist through the rest of the year, households are likely to have to pare back discretionary spending, putting the brakes on economic growth.
For the Bank of England, the challenge will be to walk the fine line between bringing inflation down while not tipping the economy into recession.”
Sri and Gopi Hinduja have been named the UK’s richest people, with an estimated £28.5bn fortune – the largest recorded in the 34 years of publication of the Sunday Times rich list.
The brothers who run a property-to-industrial conglomerate from London saw their wealth swell by £11.5bn over the past year to put them at the top of the annual wealth ranking ahead of the inventor Sir James Dyson, who is in second place with £23bn.
Sri, 86, and Gopi, 82, Hinduja and their extended family own a wide range of industrial and financial businesses and investments based mainly in the UK, India and Switzerland. They are currently transforming the Old War Office building in Whitehall into a Raffles hotel with 120 rooms, 11 restaurants and 85 serviced apartments.
As Britons face the biggest cost of living crisis in decades, the number of billionaires in the UK hit a record 177, up six on 2021. The combined wealth of UK billionaires hit £653bn, up £59bn or 9.4%.
“While many of us are experiencing the greatest cost of living squeeze we can remember, the super-rich have had another record year,” said Robert Watts, the compiler of the list.
“This year’s Sunday Times rich list again uncovers record wealth and more billionaires than ever before.”
Shares in online shopping group THG have jumped over 25% at the start of trading, as a venture capital group controlled by property tycoon Nick Candy explores an offer for the beauty and nutrition online retailer.
Candy Ventures said last night that it was in the “very early stages of considering a possible offer” for THG, formerly known as The Hut Group.
THG sells beauty and sports nutrition products through websites including Lookfantastic and Cult Beauty, and also offers technology and logistics expertise to other retailers.
My colleague Mark Sweney explains:
Candy – a Chelsea supporter who was recently linked with a bid for the Premier League club after it was put up for sale by Russian oligarch Roman Abramovich, who has been hit with sanctions since Moscow’s invasion of Ukraine – confirmed the approach but refused to elaborate.
“I can’t talk right now, I am about to go into a premiere,” he said, ahead of the first UK screening of Tom Cruise’s sequel to Top Gun at London’s Leicester Square. “I can’t comment on that anyway.”
Candy Ventures acknowledged the “recent press speculation” about THG attracting bidder interest, which has galvanised his investment vehicle to explore a potential offer.
Last month, Manchester-based THG said it had dismissed “numerous” recent takeover approaches as “unacceptable”.
THG has also rejected an unsolicited offer of 170p per share from Belerion Capital and King Street Capital Management.
Despite jumping to 146p, THG shares are still sharply lower than their 500p flotation price in September 2020.
The bounce in retail sales may mean a severe recession is not inevitable, says James Smith, developed markets economist at ING, if people dip into their savings.
But with consumer confidence at record lows, the UK economy could shrink this quarter:
Today’s consumer confidence figures fell below all-time lows, and that’s especially noticeable when looking at consumers’ outlook for personal finances. Assuming consumers remain more enthusiastic about services spending rather than goods in the near-term, we suspect this cost of living squeeze will be more acutely felt on the high street and among online retailers over the coming months.
So despite the latest bounce in retail sales, we still narrowly suspect the economy will experience negative growth this quarter – though if it happens it will be more down to falling health output and the effect of the extra bank holiday, than the deteriorating consumer story.
A more severe downturn may still be avoided if consumers dip into their pool of savings accumulated through the pandemic, which amount to around 8% of GDP in excess of what we’d have expected had Covid not happened – the major caveat of course being that these are more heavily concentrated among higher-income workers.
Nicholas Farr, assistant economist at Capital Economics, says the economy may have held up better than thought:
The unexpectedly strong 1.4% m/m rise in retail sales in April suggests that the cost of living crisis hasn’t caused consumer spending to collapse and means that the economy may have a little more momentum than we thought.
It also supports our view that a weaker economy won’t solve the issue of sky-high inflation for the Bank of England without interest rates having to rise much further.
The retail sales report also shows the stark impact of inflation, particularly the jump in petrol and diesel.
Shoppers actually spent 4.5% more in April than a year ago, but ended up with 4.9% less stuff.
On a monthly basis, retail sales values (the amount spend) jumped by 1.9%, but volumes (the quantity shoppers bought) were 1.4% higher.
And over the last quarter, people spent 10% more than a year ago, to get 1% more items.
That widening gap between retail sales values and volumes reflects rising prices in the shops, with inflation now at a 40-year high of 9%.
If you strip out fuel sales, the gap narrows – but it’s still there:
[I think the last line should read ‘volume (excluding automotive fuel)‘]
Andrew Sentance, senior adviser at Cambridge Econometrics and a former Bank of England policymaker, says it shows consumers are being squeezed.
Here’s some early reaction to April’s rise in retail sales.
Keith Church, head of economic modelling at risk consultancy 4most, points out that the wider picture remains subdued:
Suren Thiru, head of economics at the British Chambers of Commerce, also highlights this point:
Kate Nicholls, CEO at UKHospitality, agrees that the data suggests people have been staying at home more:
Retail sales have risen unexpectedly, in a sign that squeezed consumers have been staying at home more due to the cost of living squeeze.
Retail sales volumes across Great Britain rose by 1.4% in April, following a fall of 1.2% in March, the Office for National Statistics reports — better than the 0.2% fall economists had expected.
The recovery was driven by a rise in food store sales volumes — up 2.8%, due to higher spending on alcohol and tobacco in supermarkets (supermarket food sales were broadly unchanged).
Sales volumes at alcohol and tobacco stores jumped 8.4% over the month – another sign that more people have been heading to the off-licence instead of the pub.
There was also a jump in clothes sales, which may show people are preparing for summer holidays and events such as weddings. That lifted online shopping.
Fuel sales rose 1.4% after a 4.2% tumble in March when record increases in petrol prices impacted sales (prices have hit new highs this month, though).
But the broader picture is still weak: over the last three months, sales volumes have dropped by 0.3% when compared with the previous quarter. That continues the downward trend since summer 2021, as rising inflation has hit disposable incomes.
April’s retail sales volumes were 4.9% lower than a year ago, when spending was boosted by the relaxation of lockdown rules.
ONS deputy director for surveys and economic indicators Heather Bovill explains:
“Retail sales picked up in April after last month’s fall. However, these figures still show a continued longer-term downward trend.
“April’s rise was driven by an increase in supermarket sales, led by alcohol and tobacco and sweet treats, with off-licences also reporting a boost, possibly due to people staying in more to save money
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The cost of living squeeze has pushed consumer confidence to its lowest on record, adding to concerns the UK could be falling towards recession.
Research company GfK’s UK consumer confidence index fell 2 percentage points to minus 40 in May, its lowest level since records began in 1974, beating the previous record set in the financial crisis.
The survey found that people’s personal financial stituation had deteriorated over the last 12 months, making them less likely to make major purchases. The general economic view had worsened too, as inflation climbed to its highest in decades.
Joe Staton, client strategy director at GfK says:
“This means consumer confidence is now weaker than in the darkest days of the global banking crisis, the impact of Brexit on the economy, or the Covid shutdown. Consumer pessimism is most evident in depressed sub-measures on the general economy at -63 for the past year and -56 for the coming year.
The Major Purchase Index has decreased for each of the past six months and is now at -35, reflecting the latest dismal set of retail sales figures. Even the Bank of England is pessimistic, with Governor Andrew Bailey this week offering no hope of tackling inflation. The outlook for consumer confidence is gloomy, and nothing on the economic horizon shows a reason for optimism any time soon.”
Bank of England chief economist Huw Pill speech could give his view on the economic outlook, when he pays a visit to Wales today.
Elsewhere, European stock markets are expected to open higher, recovering some of Thursday’s tumble:
Shares in ecommerce group THG could surge, after British property tycoon Nick Candy revealed last night that he is considering a takeover offer for the company.
- 7am BST: UK retail sales for April
- 7am BST: Sunday Times rich list published
- 8.30am BST: Bank of England chief economist Huw Pill speech during an agency visit to Wales
- 12.30pm BST: Canadian private sector payrolls
- 3pm BST: Eurozone consumer confidence (flash estimate) for May