UK CPI, Inflation & Budget
‘It is estimated that even before the Bank of England raises rates again, renters in London are already spending over 50% of their incomes on rents and domestic bills (the average rent in London is now almost ￡2,000 per month, therefore just to pay rent alone needs a salary of ￡30k, which is the average salary for the UK)’,?Macro Thoughts, March 14. UK Average Earnings increased by 4.8% including bonuses, and 3.8% excluding, but are not keeping pace with CPI, mortgage, rent, fuel and food increases. According to the ONS CPI is expected to average 7.4% this year.??
UK CPI increased 6.2% yoy in February, the fastest since March 1992, which is an easy headline and makes a good story for newspapers; but consider, in February 2021, CPI increased by just 0.4% yoy and some at the time were even suggesting the possibility of disinflation. Of greater concern is the 0.8% mom rise in February, before oil prices spiked, before sanctions started on Russia, and before the rise in taxation and energy prices.
The rise in CPIH of 5.5% yoy and 0.7% mom was led by housing and household services, which rose by 1.39%, principally from electricity, gas and other fuels, and owner occupiers’ housing costs. There were no large offsetting downward contributions.
Contributors to the year on year rise in CPI included:
·???????Recreation and culture 2.5%
·???????Clothing and footwear 8.8%
·???????Furniture, household equipment and maintenance 9.2%
·???????Food and non-alcoholic drinks 5.1%
CPI exceeded the forecasts of the Bank of England and Treasury, while there were pressures on wages from Brexit, even before COVID.??In the short term, the conflict in Ukraine has pushed global prices higher, but there will be benefits from accepting Ukrainian workers into the labour market.?
The 1.4% mom rise in Input PPI is another warning that price pressures are coming through from manufacturers, while Bank of England rate increases will be feeding into higher rents, and the UN FAO food index is already at a record high.?
UK producers have a problem; their imported material costs have risen, but they are now starting to struggle with passing on higher prices, as Output PPI increased by 0.8% mom, and Core PPI has increased from 9.5% in January, to 9.9%. All this suggests the market is right to start pricing for a slowdown in growth, even a recession, and while the rise in US yields may be preventing the UK curve from flattening, at least the BOE is underway with rate increases, even after its unfathomable stall in November.
The UK unemployment rate has now declined to 3.9% in the three months to January 2022, the lowest in two years, but the Participation Rate is still too low (it was 64.2% in March 2020), and as is the case in the US, this seems to be being ignored.?
According to House of Commons statistics:
Following the financial crisis, there were two major trend changes in employment, zero hour contracts and increased self-employment, and neither are fully picked up, or accurately reflected, in official statistics; therefore, if a mortgage broker on ￡100k per year was forced to make a career change, and become??a self-employed taxi driver, there would be lifestyle changes that are not included in statistics, which is why the Philips Curve theory, which Central Banks are so fixed on, failed to give accurate and timely indications for policy decisions.?
This was why, when lockdowns first started, there was surprise at the size of unemployment, and is why Participation Rates are not improving as quickly as many expected they would have. That taxi driver is now experiencing higher costs for work and at home, and with house prices rising, may have been tempted to return to the property market, just as rate increases start to impact.
Many may have also sold their car during the pandemic, to help pay the bills (the self-employed were given limited help through the lockdowns), and will have needed to buy a replacement as some normality returns, but will need to compete with car rental companies also rebuilding their stocks. We understand that one of Europe’s largest used SUV sellers is struggling to bring cars onto the market, because of managing and preparing the cars they have already sold – yet, contradictorily, they are having to reduce asking prices.
‘A 25bp mortgage rate increase will add ￡500pa on a ￡200k loan, on top of the rise in energy bills, which will result in increases in rents and more than take away the benefits gained from Sunak's support announced during the week. A 50bp increase would have added more than a ￡1k a year to the average mortgage repayment.?The value of an average home in the UK is just over ￡250k.’,?Macro Thoughts, February 6.??In its latest report, released today, the ONS showed the average house price had increased to ￡274k.
This week, UK Rightmove showed the average?asking price?for a property coming to the market in March increased by 1.7%, and now exceeds ￡350k for the first time. Properties with four or more bedrooms rose on average by 3.8% (+￡23,619), with an increase in new sellers coming onto the market, but the 12% increase in new listings for this sector compared with the same month last year still seems limited, given the lifting of COVID lockdowns.
It would be easy to suggest the property market is buoyant, however, for a property market to have healthy price increases it needs economic strength and higher real earnings, to encourage sellers to move up the ladder. We have noted that asking prices may have started to be reduced from their original pricing and properties are coming back on the market at higher prices, having not previously achieved a sale. As the Bank of England has now started to raise rates, consumers are facing higher domestic bills, and the average number of properties estate agents have on their books has dropped to just 12.
The trend has been for those who are on the ladder to sell their house in anticipation of being in a better position to buy a property when it comes to market, but to do that successfully, they need to factor in the rise in rents.?
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Rightmove had predicted that UK rents will increase by 6% in 2022, following an official increase of 2% in 2021, according to the ONS. In reality, with house prices rising around 10% yoy, rents may have increased at a faster pace, and with mortgage rates rising, pressure in the rental sector, particularly as more return to working in cities, is likely to be stronger.?
Budget - Chancellor Sunak was scheduled to add ￡21bn to the economy, to cushion households from a surge in costs, while government borrowing has been lower than many expected, with tax receipts being stronger than anticipated.?
He pledged that 30 million in the UK will benefit from a tax cut of ￡330, being able to earn ￡12,750pa without paying any income tax or National Insurance, with the NI threshold raised by ￡3,000 ahead of the 1.25% increase. In 2024, for the first time in 16 years, the basic rate of income tax will be cut, from 20p to 19p in the pound.
Cutting fuel tax by 5p a litre will help consumers, but there can be a difference of 5p between one petrol station and another and, as we said before, will this be fully passed on?
In 2021, the UK had the highest growth rate in the G7, but this followed severe weakness in 2020 from the onset of COVID. It is estimated by the government that ￡83bn will be paid on debt interest, the highest on record and four times that of 2021.
This assumes Debt to GDP of 83.5% in 2022-23 and it falling below 80% by 2026-27. Borrowing as a percentage of GDP is expected to 5.4% in 2022 and 3.9% in 2023, but there are risks from the Ukraine conflict, higher global prices and interest rates, and slowing growth. The OBR anticipated UK GDP will be 3.8% in 2022, higher than our forecast, particularly since there is an increased expectation for a global slowdown.
The US is expected to raise rates at every meeting in 2022, with the possibility of 50bp increases at the next, and possibly the following, meeting.??We doubt the Bank of England will follow one for one and, by the end of the year, the Fed is likely to be less hawkish (rate cuts are being priced for 2024); therefore, the MPC will need to take the currency into their thinking on policies, balancing interest differentials against the increased cost of borrowing.?
We maintain that, as the year progresses, those economies that have managed inflation better through fiscal policies, will be in a better position to manage any growth slowdown, while too aggressive monetary policies will result in higher inflation, and spending cuts, therefore higher unemployment.?
For the past eighteen months, we have favoured taking advantage to be long Sterling against USD, EUR and JPY on various occasions; we continue to anticipate GBPEUR breaking out of the range held since the Brexit referendum, with a clear break above 1.20.
Macro Thoughts Ltd.
www.macrothoughts.co.uk?????[email protected].
Member of Euro IRP, the STA and the Royal Economic Society
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