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Saturday 24th March 2018
Hi Friend,
Inflation is falling ...
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The rate of inflation is falling. The pressure on real incomes is easing. The headline CPI rate fell to 2.7% in February down from 3.0% prior month. The impact of oil, commodity prices and the depreciation of Sterling is working it's way out of the inflationary spiral.
Goods inflation slowed to 3%. Service sector inflation fell to 2.4%. The latter is a measure of the slow down in the retail and leisure sector perhaps. Producer prices also eased back. Output prices increased by just 2.6%. Input costs increased by just 3.4%. The latter peaked at 20% in January last year. So is the worst over for now? Well yes we think so.
Expectations are for headline inflation to average 2.4% by the end of the year and probably stay around that level into 2019. Good news for households. Earnings in the three months to January were 2.8%. The real income pressure, (CPI basis) will probably be eliminated in the first quarter. With earnings expected to rise towards 3% this year, the pressure on spending may ease slightly.
Just as well for retailers. Volumes increased by just 1.5% in February. Values increased by 4%. The carnage in retail continues with store closures and defaults the trend in the high street and on the retail parks. Part of the reason of course is the continued penetration of online sales. In February, online sales increased by 14%, accounting for 17% of all retail action.
Online food sales increased by 14%. Online sales currently account for just 5.5% of all food sales. The potential for further penetration is substantial. With home and drone deliveries, the "millennials" will shop on line using mobile phones to access the weekly "bulk shop" and "top up" treats.
Unemployment figures were also released this week. Headline unemployment increased slightly as the overall rate fell to 4.3%. We are at or nearing full employment. Recruitment difficulties are increasing. Over 800,000 vacancies are challenging some 1.45 million out of work.
Traditionally we analyse unemployment into cyclical, structural and frictional. It is clear cyclical levels are near lows, a higher level of structural and frictional job loss may well be in play. We may have seen the best in terms of the unemployment rate at least for this cycle.
So inflation is falling, price pressures are easing, so what happens next with rates?
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Rates set to rise ...
The Fed hiked rates this week. New Fed Chairman Jerome Powell moved to increase rates following upward revisions to US growth this year. Further rates are indicated in 2018. The Fed blue dot plot suggest US rates could rise to over 3% by 2020.
Back in the UK, the MPC voted to hold rates. It was not unanimous. Two members of the committee voted to increase rates by 25 basis points. Most analysts now expect a UK rate rise in May. Further increases are now expected this year.
Gertjan Vlieghe, a member of the MPC suggests borrowers should prepare for interest rates to rise to 2% over the next three years. Slow and steady increases, perhaps two in each year should be the guideline for cautious curation of debt. Whilst external inflation pressure are subsiding, domestic pressures are increasing. Wage pressures may become the new driver of pricing, or so it is thought.
"Rate Normalisation" will become the new Central Bank mantra, slowly revealed as policy makers remain confident about growth. With a target inflation rate of 2% and a real rate premium of equal measure, gilt rates and short rates should return to 4% plus in the US and the UK. Yes, we are leaving Planet ZIRP! It's official.
Ten year gilts closed sub 1.5% this week. The Debt Management Office is offering a 55 year bond deal and why not? Debt won't get much cheaper.
In the US markets fell as concerns rise about a trade war with China. The adults are leaving the White House. The Day Care center is unattended. Trump's lead defense counsel is abandoning ship. John Dowd lead lawyer in the
Mueller investigation claims, Trump is ignoring his advice and has parted company with the President. Changes are taking place ...
Trump has appointed Peter Navarro to trade and John Bolton as head of National Security. Navarro is the author of "The Coming China Wars" and Bolton has long been an advocate of pre-emptive strikes on Iran and North Korea.
"Peace in our time" may become "Peace in Pieces" anytime soon. A cheery thought ... oil and gold the beneficiaries in the short term ...
That's all for this week, have a great week-end,
John
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