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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Real wage squeeze deepens as UK inflation hits six-month high of 2.7% – as it happened

a basket of goods in a supermarket
UK inflation has jumped to 2.7%, much higher than forecast, again putting the squeeze on households. Photograph: Matt Cardy/Getty Images

Summary: Inflation shock hits households

Time for a recap:

British workers are facing a renewed wage squeeze after inflation jumped unexpectedly to a six-month high.

The Consumer Prices Index rose by 2.7% year-on-year in August, up from 2.5% in July. The City had expected a drop to 2.4%.

Higher clothing prices, transport bills and recreation costs all combined to push the cost of living up at a faster pace.

The UK inflation rate

It means inflation is now rising faster than total pay again, meaning the spectre of a cost of living squeeze still looms over the UK economy.

TUC General Secretary Frances O’Grady has called on ministers to do more, including boosting pay for the poorest:

“The pay squeeze is tightening again, but the government is doing nothing to get wages rising faster.

“The minimum wage should be put up to £10 an hour as quickly as possible. And we need a National Investment Bank to target communities that are most in need of new industry and better jobs.

“Unions are fighting hard to get workers better pay, but we need new rights to enter workplaces and negotiate with employers for fair pay rises.”

Economists called the news a ‘body-blow’ for families, warning that inflation could continue to spike if Brexit uncertainty weakens the pound.

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond Fund, says:

“This was a nasty inflation shock and, as we have said before, shows that a gentle glide back to the 2% target cannot be taken for granted.

“Looking at the components of RPI (up 3.5%), which is the underlying index for linkers, it appears that housing, leisure and travel costs have driven the stronger than expected inflation print. Indeed, the motorist continues to be clobbered by high petrol prices, which are up nearly 12% year-on-year. We would not read too much into the uptick in clothing and footwear, as this is a volatile component, and the trend here is not far from the four-month average.

“The medium-term outlook for inflation remains unclear due to Brexit risks and potential supply disruptions. Moreover, ‘shrinkflation’ has been very much in evidence in Europe, for example, the size of fries in Belgium has contracted due to the very poor potato crop owing to the very dry weather over the summer. The UK will not be immune from similar pressures.

In other news:

China has appealed for free trade and multilateralism to be protected, after Donald Trump triggered another round of tariffs between the two economic powerhouses.

Premier Xi also promised that China would not launch a currency war by weakening the yuan, saying:

“One-way devaluation will do more harm than good to China’s economy. China will by no means stimulate exports by devaluing the yuan.”

Stock markets are mostly higher, on optimism that the trade dispute can be resolved. Japan’s Nikkei hit an eight-month high, while Britain’s FTSE 100 index is up 42 points at 0.6%.

The CEO of Danske Bank has resigned over a huge money-laundering scandal.

UK supermarket chain Tesco has launched its new discount chain, Jack’s, in an attempt to push back against budget groups Aldi and Lidl.

Updated

Exactly ten years ago, Wall Street was suffering a dramatic plunge.

Major bank share were slumping through the floor as the aftermath of the Lehman Brothers collapse ripped through the markets.

It’s a gentler picture today. The Dow Jones industrial average has gained 107 points in early trading, or 0.4%, to 26,354.

Investors in New York are taking yesterday’s tit-for-tat tariffs between the US and China in their stride, hoping that negotiations might deliver a breakthrough.

But if you want to relive events a decade ago, here you are....

Far be it from me to point the finger when it comes to spelling mistakes, but this is quite impressive:

Danske Bank CEO quits over money-laundering scandal

In other news, the CEO of Denmark’s Danske Bank quit today over a massive money-laundering scandal.

Thomas Borgen quit as Danske reported that some €200bn in questionable money flowed through its Estonian branch, a jaw-dropping amount.

Danske’s small but highly profitable Estonian operation had 15,000 non-resident clients, including people based in the UK, Russia and the British Virgin Islands.

Analysis of 6,200 of the riskiest customers showed that the “vast majority have been found to be suspicious”.

Borgen said he was stepping down because Danske had “failed to live up to its responsibility”

Anti-corruption campaigner Bill Browder, a critic of the Russian government, says managers, regulators and the police all dropped the ball:

NIESR, the economic think tank, report that inflationary pressures were strongest in London last month, and weakest in Yorkshire.

It says:

At the regional level, underlying inflation was highest in London at 1.4 per cent and lowest in Yorkshire and the Humber at 0.5 per cent in the year to August 2018

Pound hit by Brexit headlines

Ouch! The pound has just shed all its earlier gains and slumped into the red.

Sterling has dropped back to $1.312, from the eight-week high of $1.32 after this morning’s inflation shock.

Why? Because Brexit negotiations have apparently hit another roadblock. According to The Times, the UK has decided to reject Europe’s latest offer to fix the Irish Border puzzle.

The Times says:

Theresa May will today reject Michel Barnier’s “improved” offer to solve the Irish border issue, warning that it still violates Britain’s red lines.

The EU’s chief negotiator said yesterday that the EU was preparing to table a new “backstop” proposal that he hoped the government would be able to support.

He said the new plan would not involve customs checks in the Irish Sea and would respect the “territorial integrity of the UK”.

But a senior government source said that Mr Barnier had still not dropped his insistence that Northern Ireland be treated as a separate customs jurisdiction from the rest of the United Kingdom.....

Theresa May will meet with EU leaders in Salzburg later today for an informal summit, so we could hear more on Brexit soon. She’s also ruled out another referendum (again)...

Back on UK inflation...and Capital Economics reckon the cost of living squeeze might ease by next summer:

That all depends on how Brexit plays out, I suggest, as a disorderly end to negotiations would surely weaken the pound and drive up import costs.

A B&Q store.

In other retail news, shares in DIY chain Kingfisher have slumped by 4% to the bottom of the FTSE 100 leaderboard after posting its latest financial results.

Kingfisher, which runs B&Q, reported an 18% slump in adjusted pre-tax profits in the six months to 31 July.

CEO Véronique Laury, Chief Executive Officer, blamed difficulties in France for holding back her transformation plan:

“Transformation on this scale is tough, and there are challenges that we’re working through. There is still much to do to improve our performance in France and to remove inefficiencies within the business as we continue to transform at pace.

I am confident that we have the right plan and the opportunity for Kingfisher is significant.

Kingfisher’s French profits plunged by almost 30%, taking the shine off a 1.3% rise in UK profits.

Callum Stayton, retail sector specialist at management consultancy Vendigital, reckons Tesco could make a success of its new discount arm:

“The timing is right for Jack’s as market share at the discount end of the market is still growing at a rate of 10 percent per year, so there is still a lot to play for. Set up costs will also be quite low as Tesco plans to scoop up sites that have been vacant for a long time or redevelop some of its less-successful Metro stores.

“Following its takeover of Booker, Tesco has first-hand experience of sourcing and supplying large volumes of goods and this will stand it in good stead when rolling out Jack’s, which is expected to stock higher volumes of fewer goods than its mainstream stores.”

Tesco unveils new Jack’s concept, at their site in Chatteris, Cambridgeshire
Tesco unveils new Jack’s concept, at their site in Chatteris, Cambridgeshire Photograph: Sam Russell/PA

With inflation rearing up, more UK consumers might be interested in Tesco’s new discount supermarket chain.

Tesco has been unveiling “Jack’s” to a group of journalists in Chatteris this morning.

It’s aimed firmly at German discounters Aldi and Lidl, with fewer items than a traditional Tesco’s and a firm focus on British products.

My colleague Sarah Butler explains:

The first store has been unveiled by the Tesco chief executive, Dave Lewis, in the small Cambridgeshire town of Chatteris. The public will get their first chance to shop at Jack’s on Thursday morning when the store opens, along with a second outlet in Immingham, Lincolnshire.

The new chain is named after Jack Cohen, who founded Tesco 99 years ago, earning the nickname “Slasher Jack” for his “pile-it-high, sell-it-cheap” approach to retailing.

Lewis said the group planned to open 10 to 15 Jack’s stores over the next six months, about half of which will be converted Tesco outlets while others will be next to existing Tesco stores and some on new sites.

Some price are certainly cheap; bread, for example, is on the shelf at 45p per loaf. Chicken is on offer at £1.60 / kg (corrected), compared to £2.75 / kg for a Waitrose Essential bird.

Other prices look less sensational, as Tesco’s beancounters try to pitch their new offering correctly:

Jack’s also makes it easier to hand over your hard-earned cash, with a mobile app as an alternative to its traditional checkouts and self-service tills.

Here’s our full story:

Updated

Three factors drove UK inflation higher last month.

In Transport, the cost of travelling by air or sea rose in August. Petrol prices rose by 1.4p per litre, while diesel rose by 1.2p per litre.

Clothing and footwear also become more expensive, with prices rising by 3.1% between July and August. Women’s and children’s clothing rose particularly sharply, the ONS says.

Recreation and culture costs rose by 0.6% between July and August. The ONS blamed “pricier theatre tickets” (although it’s hard to believe this had a huge impact on the nation’s wallets) and another rise in computer game prices.

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), also fears that a no-deal Brexit could shove inflation higher.

“Inflation surprisingly rose for the second successive month in August, largely wiping out the recent recovery in real wage growth and emphasising the continued squeeze on consumers.

“The strong growth in producer prices indicates that inflationary pressures further down the supply chain remain significant and could lift inflation higher in the coming months. However, the upward pressure on prices remains transitory, and inflation should resume its ease back towards target once the impact of the recent increase in oil prices drops out of the calculation.

“The possibility of a disorderly Brexit is the key risk to the UK’s outlook for inflation as it could result in a substantial decline in sterling, which could significantly increase inflation and exacerbate the financial squeeze on consumers and businesses.

Expert: We're all getting poorer again

More bad news for households: inflation could keep rising in the months ahead, especially if Brexit talks flounder (weakening the pound).

If so, that could mean inflation keeps rising faster than total pay.

Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International, explains:

“Today’s inflation figures are a body blow to UK households after the latest CPI figures showed that price rises jumped 2.7% in August, driven largely by increased costs for recreational and cultural goods and services, transport services and clothing. The latest figures mean that wage growth including bonuses (2.6%) has once again fallen behind inflation and means that we are all getting progressively poorer again.

“To rub salt in the wounds there’s also a distinct possibility that inflation could continue to climb as the oil price has recently crept up to over $80 a barrel, meaning we are likely to see prices at the petrol pumps start ticking up.

“And on top of this there’s the ongoing uncertainty around the Brexit negotiations which could put an end to sterling’s recent good run. If recent sterling strength is reversed then the cost of imported goods will start going up again and UK businesses reliant on these goods will need to start hiking prices in order to protect their margins.

City economist Simon French of Panmure Gordon says the slump in the pound in August (it hit a 14-month low) drove inflation up:

Economist Ulrik Bie says rising inflation is pushing more UK people into debt, because wages aren’t rising fast enough.

Inflation is taking a larger bite out of wages

The jump in UK inflation to 2.7% is bad news for households.

Average basic pay is only rising by 2.9% per year at present, meaning pay rises are only just keeping ahead of the cost of living.

Total pay, including bonuses, is rising by 2.6% - meaning no real wage growth at all.

That’s particularly disappointing as unemployment is at a 43-year low, which ought to give workers the upper hand in wage negotiations.

This is why inflation has gone up

The Office for National Statistics, Head of Inflation Mike Hardie, says:

“Consumers paid more for theatre shows, sea fares and new season autumn clothing last month. However, mobile phone charges, and furniture and household goods had a downward effect on inflation.

“UK house prices continued to grow but at their lowest annual rate for five years, driven again by a fall in London. The housing market saw strong growth in the North West, South West and West Midlands.”

UK house price growth hits five-year low

Although prices are rising faster in the shops, UK house price inflation has fallen.

Average house prices in the UK rose by 3.1% in the year to July 2018, the Office for National Statistics reports, down from 3.2% in June.

This is the lowest UK annual rate since August 2013 when it was 3.0%.

And in London, prices have now shrank by 0.7% over the last year.

At 2.7%, UK inflation is now at its highest level in six months.

Rising transport, clothing and recreational goods prices drove the cost of living higher in August, the Office for National Statistics reports.

Food and alcohol prices also drove inflation up:

UK inflation, in detail
UK inflation, monthly changes Photograph: ONS
UK inflation, in detail
UK inflation, year-on-year Photograph: ONS

Sterling has jumped to an eight-week high against the US dollar.

It’s trading over $1.32 for the first time since late-July.

Traders are calculating that higher inflation makes an early interest rate rise more likely.

Updated

UK inflation jumps to 2.7%

NEWSFLASH: Britain’s inflation rate has jumped to 2.7% in August, putting a squeeze on households again.

That’s up from 2.5% in July, and dashes expectations that the consumer prices index would drop to 2.4%.

More to follow....

Updated

Bank of England: We might help primary children learn economics

Andrew Haldane.

Over in Tallinn, Bank of England chief economist Andy Haldane is giving a speech to mark the 100th Anniversary of the Bank of Estonia.

Rather than bringing a telegram from the Queen, Haldane has turned up with a speech on central bank communication through the ages (‘oooh, it’s just what I always wanted’).

In it, he points out that central bankers were notoriously secretive once:

It was only a generation ago that, when asked by Mervyn King for a one-word piece of advice, Paul Volcker replied “mystique”. To that point, opacity rather than transparency coursed through central bankers’ veins. That bloodline ran from Montagu Norman a century ago (“never explain, never apologise”) through to Alan Greenspan a generation ago (“I’ve learned to mumble with great incoherence”).

Today, though, we have forward guidance on interest rates and regular press conferences to help get the message out.

Education is another key part of the BoE’s strategy, Haldane says. Through its econoME project, it provides classroom materials on the economy and financial system for use in schools. Secondary schools at present, but Haldane has ambitious plans to spread the word:

As the name suggests, and like our recent public communications efforts, these materials describe the economy and finance in terms which are personal and relatable to young people’s lives. Why does the economy and finance matter to me? And how do my decisions in turn affect the economy?

We set ourselves a target of reaching 400 state schools with econoME during the course of this year. So far since launch in April, over 1,000 schools have downloaded the materials, conceivably covering around 90,000 pupils. 52 This demonstrates the potential pent-up demand for school materials on economic and financial issues.

The Bank’s aim is to reach close to 1,500 schools by mid-2020. We are currently considering where next to take our education initiatives. A promising avenue would be a younger age range, say 7-11 year olds. This will require different materials and possibly a different approach. A more challenging market still would be adults, perhaps linked to existing initiatives to boost economic and financial literacy in the public at large.

China is often accused of discriminating against foreign companies on its turf, in favour of local (sometime state-controlled) firms instead.

Chinese premier Li Keqiang, though, is promising to give foreign investors equal treatment.

The FT’s Lucy Hornby has the details:

“Chinese and foreign companies can compete on a level playing field in this big market. That gives better vitality to the Chinese economy,” Mr Li said at the World Economic Forum, triggering prolonged applause from an audience that included high-tech manufacturers from overseas and small businesses from provincial cities.

China, he said, would cut taxes and unlock financing for the country’s private businesses. “The pool is full of water, the challenge is to unblock the channels,” he said, adding that Beijing would not devalue the renminbi but keep its currency “at an adaptive and equilibrium level”.

European stock markets have hit a two-week high in early trading.

In London, the FTSE 100 is 17 points higher at 7317 (+0.25%).

Mining stocks are leading the way, as traders express optimism that China and the US might cool their trade dispute.

Connor Campbell of SpreadEx explains:

Though China announcing tariffs on $60 billion in US imports isn’t great news, it is not as bad as it could have been. The response was also tempered by the country’s deputy leader Li Keqiang urging that the ‘basic principles’ of free trade are held up, while promising that China won’t weaponise its currency (something it has already been accused of doing by Trump).

Asian markets rally despite trade war fears

A stock indicator board for the Tokyo Stock Exchange in Tokyo today.
A stock indicator board for the Tokyo Stock Exchange in Tokyo today. Photograph: Behrouz Mehri/AFP/Getty Images

Premier Li’s call for a multilateral solution to the trade dispute is going down well in the markets.

In Tokyo, the Nikkei index has hit its highest level in eight months. China’s Shanghai Composite jumped by 1%, amid relief that Beijing’s latest tariffs on the US are lower than feared.

Investors are heartened by Li’s pledge not to launch a currency war, as Naeem Aslam of Think Markets explains:

The Chinese yuan has been under the hammer due to two reasons; sluggish domestic growth and impending trade war.

China has been blamed by the U.S. for devaluing its currency to gain a competitive edge. Over in Asia, we have seen that traders have felt more comfortable about China’s recent comments on currency devaluation and this has bolstered the Asian equity market.

China promises not to launch currency war

Importantly, premier Li has also pledged that China won’t weaponise its currency in its tussle with Donald Trump.

In his keynote speech in Tianjin, Li promise that Beijing hadn’t been deliberately weakening the yuan - and wouldn’t do so, either.

He said:

“Recent fluctuations in the renminbi exchange rate have been seen as an intentional measure, but that isn’t true,.

“One-way devaluation will do more harm than good to China’s economy. China will by no means stimulate exports by devaluing the yuan.”

The agenda: China appeals for free trade amid tariff battle

Chinese premier Li
Chinese premier Li speaking at the ‘Summer Davos’ today Photograph: WEF

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The threat of a global trade war looms over the financial world today, after the US and China hit each other with sweeping tariffs.

Beijing hit back at Washington yesterday, with new levies on $60bn of US goods, just hours after Donald Trump signed off tariffs on $200bn of Chinese products. This latest tit-for-tat action dragged the world economy a little closer to full-blown protectionism.

But...there is also optimism, as China’s retaliation is less severe than it had laid out last month.

And over in Beijing today, China’s deputy leader has called for more support for free trade.

Premier Li Keqiang told a World Economic Forum conference, in the eastern city of Tianjin, that such disputes must be resolved through consultation.

It is essential that we uphold the basic principles of multilateralism and free trade....

No unilateralism will offer a viable solution.”

Li also warned that the world economy now stands at “a crossroads facing a choice between globalization or deglobalization.” China, he pledged, will do its bit by opening up “at a faster pace”.

That will have gone down well with WEF at its “Summer Davos” in Tianjin.

More cynical voices might point out that China does operate plenty of roadblocks to free trade today - second behind Russia, according to one EU report this year.

But still, Li’s words may reassure investors that the two economic powers will reach an agreement on trade policies, rather than descend deeper into a swamp of tariffs, trade barriers and bad-mouthing.

Also coming up today

UK inflation data is out this morning. Economists predict that price rose by 2.4% year-on-year in August, down from July’s 2.5%. That would give workers a small but much-needed real wage boost.

Supermarket chain Tesco is launching its new discount store format, Jack’s, to compete with the success of Lidl and Aldi. It could be a game-changer, if Tesco can get it right...

Plus, traders will be watching for speeches from two central bankers; European Central Bank chief Mario Draghi, and the Bank of England’s chief economist, Andy Haldane.

The agenda

  • 9am BST: Bank of England Andy Haldane: Lecture at the Bank of Estonia 100th Anniversary conference, Estonia
  • 9.30am BST: UK inflation for August
  • 9.30am BST: UK house price data for July
  • 3pm BST: ECB president Mario Draghi speech on “Making Europe’s Economic Union work”, in Berlin

Updated

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