UK INFLATION SQUEEZING CONSUMERS AND BUSINESSES THOUGH TRUSS’ FOCUS LIES ELSEWHERE

UK INFLATION SQUEEZING CONSUMERS AND BUSINESSES THOUGH TRUSS’ FOCUS LIES ELSEWHERE

This week the inexplicably drawn-out conservative party leadership election carried on with yet more hustings generating yet more policy ideas that the market at least has to consider taking seriously. The civil service and now the financial regulators are the latest departments slated for surgery under the new regime, although why that’s seen as a high priority issue to campaign on remains a mystery. It is unlikely to happen, but also unnecessary. Taking back control means a large amount of regulating that was previously outsourced to the EU will need to be done here, necessitating a larger civil service rather than a smaller one. Something I suspect is well known by the politicians suggesting otherwise.

Elsewhere the US has decided to tackle inflation through policy. The Inflation Reduction Act signed this week is primarily a climate policy rejigged to focus on energy costs. Subsidising the rapid build out of renewable energy, energy efficiency measures such as heat pumps and the transition to electric vehicles, as well as boosting oil and gas short term, looks to solve the problem by reducing energy needs while boosting supply.

UK: INFLATION SURPASSING EXPECTATIONS SETS TONE FOR FUTURE RATES

This week presented investors with the UK’s inflation figures for July. For the first time in more than four decades a double-digit annual increase was registered, as it rose to 10.1%. This surpassed expectations of 9.8%. Increase food costs notably bread, dairy products, meat and vegetables, were the key contributors at 12.7%. Package holidays also saw a sharp increase in price from the previous year as a result of the airport baggage handling problems and restricted supply of flights. Core inflation, which is a better assessment of domestic price pressures, also picked up in July, rising 6.2%.

Despite the strength of this inflation the labour market remained tight with just a 0.1% drop in the unemployment rate. The combination of the two has assured economists in their expectations for a continuation of the strict monetary policy currently being deployed by the central bank. The print led to government bonds selling off.

ELECTRICAL RETAILERS: PANDEMIC WINNERS FEELING THE SLOWDOWN

Higher prices are forcing consumers to be more selective over what they buy. Unfortunately for electrical retailers, their goods are not high priority. AO World, an online electrical goods retailer, posted a £37mn loss for the latest financial year. Having been a pandemic winner, benefiting from the shift to online shopping, this represented an 87% fall from the £20mn profit they boasted in the previous financial year. Driver shortages and supply chain issues troubled the company through 2021 before inflationary pressures weakened consumer demand and AO’s balance sheet in the process.

Other electrical retailers such as Currys have suffered a similar fate. They too blamed falling sales on a reduction in spending and cut their operating profit margin target from 4% to 3%. Similarly, gaming group Entain revised their online revenue growth down, from mid- to high-single-digit growth, to no increase for the year. These consumer discretionary companies can be seen as leading indicators for a slowdown in spending.

SEMICONDUCTORS: EVER IMPORTANT DESPITE FALLING PRICES

The lockdowns drove up demand for chips and resulted in a tech boom as people worked from home. The result was global chip shortages and bumper profits for semiconductor producers. However, the industry has seen a downturn since the start of the new year. Consumer spending is slumping so the demand for new electronics – laptops, tablets, phones – has dropped so global chip inventory has increased. The sensitivity to the economy means it is a good leading indicator for economic strength.

The drop off comes as President Biden signed off the ‘Chips and Science Act’ which pledges $70bn in support of the American semiconductor industry and a further $200bn for scientific research. As China/Taiwan tensions build, so does too the threat to the global supply of semiconductor supply. Taiwan Semiconductor Manufacturing Company currently account for 92% of global supply of the 5nm generation of chips. China and the US are both heavily reliant on these chips, and are a key reason for escalated tensions between the two.