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Surging shop-price inflation feeds stagflation fear

By Adrian Holliday


A shopper wheels a full trolley through a supermarket aisle
Rampant shop-price inflation threatens UK growth, leading consumers to wonder how long surging inflation will last – Photo: Shutterstock

More hand-wringing for the Bank of England arrived this morning as new numbers from the British Retail Consortium (BRC)-Nielsen Shop Price Index (SPI) show that UK shop prices climbed by 2.1% in March compared to 1.8% in February.

This is the highest inflation rate rise since September 2011, and by some margin.

Fresh food inflation fared even worse, surging by 3.5% in March, up from 3.3% in February, well above the 12- and six-month average price decrease of 0.4% and the 0.4% increase, respectively. 

Recession anxiety

What do these numbers mean for the Bank of England’s (BoE’s) rate policy, as well as for the strength of the British pound sterling?

Neil Shearing, group chief economist at Capital Economics, says the number-one fear currently stalking London’s Threadneedle Street is recession.

Shearing thinks interest rates will need to be increased by around 200–300 [2%–3%] basis points (bps) in both the UK and US – and by much less in the eurozone – in order to beat inflation back down.

He says, “This would be much less than the increases of 600–1,000 [range] basis points that were needed in the early 1980s.” 

However, it’s thought the US Federal Reserve (the Fed) will raise rates at at a faster clip than the BoE. The BoE’s next meeting is 6 May – likely meaning yet more pressure on the pound.

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‘Bogging down’ fear

Delaying rate rises because of fears of economic spillovers from the Ukraine–Russia war risks inflation getting more entrenched, adds Shearing – meaning, typically, yet more policy tightening “to squeeze it out of the system”. 

If tightening is slow, or too timid to stop overheating or bubbles popping, then recession is usually the response. “This was true of the global financial crisis in 2007-2008, and also the dot-com crash in the US in 2001,” says Shearing.

Russia–Ukraine price drag

Common to all central bankers is the fear of acting too late – and the fact that it’s easier to lower rates than to hike them. But it’s not just about the headline rate – it’s the duration of a rate rise.

While many consumers can manage price inflation for a while, the long-term picture, inevitably, is more worrying as prices bite deep.

Many of the rising shop-price costs revealed this morning are just starting to be exacerbated by the situation in Ukraine, says Helen Dickinson OBE, chief executive of the BRC.

She adds: “But the full impact on prices is yet to be seen. Wheat prices have risen sharply, while the rise in oil prices has not only impacted domestic energy costs, but also the costs of fertiliser and transporting goods.”


Growth-price balance

For the moment, the BoE appears to be erring towards tempering growth risk rather than inflation. Much of the market anticipates a base BoE rate hike to 2% or more by early next year from the current 0.75%, but that could change.

Gas prices for next winter could rise dramatically once more, in which case October’s price cap could increase to 75%, thinks economist James Smith at ING.

“If oil were also to hit $150 per barrel and stay elevated,” he says, “then we could see a ‘double peak’ in inflation. Headline CPI [Consumer Price Index data] would go above 9% in October.”


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Yet while the prospect of rising interest rates is a huge worry for many, interest rates still remain well below historical ‘norms’.


The race to avoid recession

Since the late 1970s, the UK has experienced five tightening cycles. The challenge now is dramatically slowing growth married to much higher inflation – all the ingredients for stagflation.

  • Hiking rates to avoid recession carries the risk of creating a recession regardless.
  • Hence talk of ‘soft landings’, which are notoriously difficult to achieve.
  • External shocks like the Russian–Ukraine war cuts this opportunity further. 
  • The Office for Budget Responsibility (OBR) has said it thinks UK gross domestic product (GDP) growth will slow to 3.8% in 2022 and fall to 1.8% in 2023.
  • In January, the International Monetary Fund (IMF) snipped its 2022 UK GDP forecast from 5% to 4.7%.

Meanwhile, Britain’s private sector has reported the biggest surge in prices charged by companies since 1999. Optimism is ebbing away, according to new Purchasing Managers’ Index (PMI) data revealed last week. 

“Survey respondents reported an exceptionally [our italics] wide range of items as rising in price during March, with energy costs, fuel bills, logistics and salary payments the most commonly cited.”

Inflation right, left and centre 

It is the BoE’s day job to keep price growth limited and stable.

When inflation bites, you can sell less for the same (think Cadbury’s smaller Dairy Milk chocolate bars), or you can increase prices. But you can’t shrink a stroller, or a digital audio broadasting (DAB) radio.

Not all companies can pass on fast-moving prices also, which means narrower margins and smaller profits, which also has the effect of impacting their share price.

UK consumer confidence was already under severe pressure in February as the Growth from Knowledge (GfK) Consumer Confidence Barometer tanked five points to minus 31 points, the lowest reading in 17 months.

Consumers rush to plastic

There’s also increasing concern about consumer credit uptake and the inflation ructions ahead.

Yesterday, the BoE updated its money and credit report, because, it said, “Consumers borrowed an additional £1.9bn in consumer credit, on net, of which £1.5bn was new lending on credit cards.” 

The annual growth rate for consumer credit also increased to 4.4% in February from 3.2% in January – the highest pace since February 2020.

Are consumers anticipating prices rises and acting now, or is it because they need cash because nearly everything is more expensive now?

Sterling up

Earlier, news of progress from the Russian–Ukraine peace talks saw sterling gain against the US dollar, but slip against the euro

“This was due to the euro being in even greater demand than sterling,” says Lawrence Kaplin, chief market strategist at Equals Money. 

“With a lack of UK data to influence sterling moves, the pound was completely at the mercy of these external events. The sterling–euro rate is threatening to move lower through the support levels of early February,” he adds.

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