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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Markets rattled and pound slides after US inflation higher than hoped in August – as it happened

United Kingdom United States Inflation Unemployment Glassdoor
Frozen foods for sale at a Dollar Store in Alhambra, Californiam as US shoppers face high prices on everyday goods and services.
Frozen foods for sale at a Dollar Store in Alhambra, Californiam as US shoppers face high prices on everyday goods and services. Photograph: Frederic J Brown/AFP/Getty Images

Closing post

With stock markets a sea of red on both sides of the Atlantic, it’s time to wrap up.

Here’s our news story on the disappointing US inflation report:

Today’s UK unemployment reports, showing that wages are failing to keep up with inflation:

The latest on the UK’s cost of living crisis:

…preparations for the Queen’s state funeral:

And in other news:

Stocks are sliding further in Europe too, as the spectre of more US interest rate rises looms.

In London, the FTSE 100 now down a hefty 80 points, or 1.1%, at 7391 points – away from the two-week high seen this morning.

The selloff is gathering pace in New York, as disappointment over today’s too-hot inflation report sweeps Wall Street.

The Dow Jones industrial average has now shed 864 points, or 2.7%, at 31,517, while the Nasdaq Composite has lost nearly 4%.

Today’s inflation report has confirmed the Fed’s fight against high inflation is far from over, says Silvia Dall’Angelo, senior economist at Federated Hermes:

“Today’s report confirmed our view that, while headline inflation might have peaked in June, it will likely remain sticky at elevated levels for several more months - largely reflecting domestic price pressures still in the pipeline. Despite some encouraging developments in the participation rate lately, the labour market is still tight, which has supported wage growth.

A poor productivity performance in the first half of the year has also contributed to rising unit labour costs, which will put upward pressures on consumer prices – notably for services – in the next couple of quarters.

Back in the UK, Center Parcs is facing criticism after deciding holidaymakers must leave its UK sites on the day of the Queen’s funeral.

The company has announced its five parks will close for 24 hours from 10am on Monday.

Guests partway through seven-day holidays will be forced to spend the night elsewhere or go home early, while those due to arrive on Monday must arrive a day late.

Customers who want to cancel their holidays are being offered a full refund, with partial refunds for those whose breaks will be shorter than booked.

Customers are unhappy about the disruption, with some suggesting that Center Parcs could have kept the accommodation open, even if it closed its facilities:

Richard Flynn, Managing Director of Charles Schwab UK, warns that high inflation, and the interest rate increases it prompts, risk pushing major economies into recession:

“Although today’s announcement shows that inflation remains historically high, there may be signs that the pressure of inflation is abating. Company inventories are rising relative to sales, global economic growth has weakened, and the U.S. dollar is strong – all indications that price hikes may begin to slow soon.

That being said, inflation is still far-above the Fed’s target. Indeed, the Fed is likely to continue to tighten monetary policy when it meets later this month. Market pricing suggests that investors expect the Fed to continue tightening monetary policy into the first quarter of 2023.

“There’s a risk that high inflation and rising interest rates could slow economic growth, tipping the U.S. and other major economies into recession. For now, company earnings remain strong. However, investors may follow company earnings particularly closely in the second half of this year.”

Full story: US inflation slows to 8.3% in August but prices still rising

Prices in the US surged again in August but the pace of inflation slowed for the second consecutive month as energy costs fell, our US business editor Dominic Rushe reports.

The Consumer Price Index (CPI), the Bureau of Labor Statistics’ monthly cost of living survey, found prices were 8.3% higher last month compared with August last year. The figure was down from an annual rate of 8.5% recorded in July and 9.1% in June, the highest rate in four decades.

Falling gas prices were the major contributor to the drop. Gas prices have fallen for 13 weeks in a row. Nationally, a gallon of gas currently costs an average of $3.71, according to AAA, down from a high of over $5 in June.

Used and new car prices – once a major driver of inflation – fell, as did airfares.

But the prices of other goods and services are still rising.

Prices overall rose slightly over the month, 0.1% higher than July. And after stripping out energy and food costs prices rose 6.3% over the last 12 months, up from 6.1% in July. The increases were broad-based with prices for shelter, food and medical care rising fastest.

The food index increased 11.4% over the last year, the largest 12-month increase since the period ending May 1979.

Biden: it will take more time to lower inflation

US President Joe Biden has said it will take more time to curb inflation.

Biden also suggested that August’s consumer price data showed “more progress in bringing global inflation down in the U.S. economy”, despite prices rising 0.1% in the month (and 8.3% over the year).

In a statement released by the White House, Biden said

“It will take more time and resolve to bring inflation down.”

That statement also pointed to the recently-passed Inflation Reduction Act, which the president is scheduled to address in remarks later on Tuesday.

US inflation stays hot: what the experts say

Many economists are predicting the US Federal Reserve will raise interest rate by three-quarters of a point next week after today’s inflation report.

That would be its third 75bp rate rise in a row, piling more pressure on borrowers.

Here’s a round-up, starting with Seema Shah, Chief Global Strategist at Principal Global Investors:

“Today’s inflation data cements a third consecutive 0.75% increase in the Fed funds rate next week. Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core CPI is once again on the rise, confirming the very sticky nature of the US inflation problem.

In fact, 70% of the CPI basket is seeing an annualised price rise of more than 4% month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.

Alastair George, chief investment strategist at Edison Group, agrees:

“Today’s evidence of a peak in US CPI might be welcome but the figure of 8.3% was above expectations and only reinforces the need for a further 0.75% increase in interest rates at September’s FOMC meeting. Fed Chair Powell’s Jackson Hole speech called for forceful action to control inflation so the Fed now has to deliver.

The sheer magnitude of the deviation of US inflation from target implies a long period of above-target inflation into 2024, even if survey-based inflation expectations are now moving lower.

Paul Ashworth,Chief US Economist at Capital Economics, says the strength of core inflation (which jumped to 6.3% per year) confirms the Fed will hike by at least 75bp.

The 0.6% m/m increase in core consumer prices in August, double the consensus expectation, confirms that the Fed will hike its policy rate by at least 75bp next week.

There might be some late speculation that the Fed could even go for a 100bp hike although, with rates now close to neutral, we doubt that will happen. That outsized monthly gain in underlying prices, which took the annual core inflation rate up to a new cyclical high of 6.3%, from 5.9%, is somewhat hard to square with all the other evidence pointing to signs of prices falling back in several key components. In short, we can see disinflation everywhere except in the official CPI statistics.

US stock market takes a tumble

Stocks are falling sharply in New York at the start of trading.

The Dow Jones industrial average has tumbled by 2%, or 648 points, to 31,732, on gloom that US inflation is proving more persistent than hoped.

Every member of the Dow is down, led by Nike (-4%), Salesforce.com (-3.6%) and Boeing (-3.1%).

The tech-focused Nasdaq has plunged 3% -- technology stocks tend to underperform in a high interest rate environment (it erodes the current value of their future earnings).

This is a good explanation of how inflation is broadening beyond energy prices:

US government bond prices are falling too:

Updated

Bond prices are sliding too, as investors seek a higher rate of return for holding government debt.

The yield, or interest rate, on 10-year UK gilts has jumped to 3.172%, the highest since July 2011.

Five-year gilt yields are jumping too:

Not what the UK government wants to see, as it looks to finance Liz Truss’s energy bill freeze plan through higher borrowing.

Futures fall as Fed 'nowhere near done raising rates'

Wall Street is set to open sharply lower, on anxiety that high inflation will mean another bumper interest rate rise next week.

Neil Wilson of Markets.com reports;

Just saw a heck of move in the futures as investors took a hotter-than-expected inflation number as a signal that the Fed is nowhere near done raising rates. 75bps next week is nailed on now and markets now see a 20% chance of a 100bps move.

And this inflation number – having failed to live up to hopes it would show a real sign of cooling in inflation pressures as energy was sharply down, points to more prolonged hiking cycle and for the Fed to need to go higher – Apr ’23 now priced for 4.2%...curve still inverted still shows markets think Fed will eventually snap.

Markets saying Fed will get its recession but it’s not able to adjust to the fact that rates will need to stay higher for longer.

Markets fall amid US inflation gloom

European stock markets have fallen into the red, on disappointment that US inflation was hotter than hoped in August.

The FTSE 100 index is now down 51 points, or 0.7%, at 7421, having climbed over 7,500 before the CPI print hit the wires.

Germany’s DAX and France’s CAC are down around 0.3%, losing their earlier gains too.

Investors are bracing for even more sharp rises in interest rates, to squeeze inflation out of the economy, which will hit growth and risk pushing up unemployment.

The pound is extending its losses, now down almost 1.5 cents today at $1.154, having traded over $1.17 before the inflation report.

Biggest jump in US food inflation since 1979

Ouch. The US food index jumped by 11.4% in the last year, the largest 12-month increase since May 1979.

Food to eat at home cost 13.5% more than in August 2021, showing how American families are being by soaring inflation.

That includes a 16.4% increase in cereals and bakery products, a 16.2% jump in dairy prices, and a 9.4% rise in fruits and vegetables.

US core inflation rises again

The bad news is that the prices of many items kept rising last month, pushing up core inflation.

The index for all items less food and energy rose 0.6 percent in August, a larger increase than in July.

That lifted annual core inflation to 6.3%, up from 5.9% a month ago.

The US inflation report explains that:

The indexes for shelter, medical care, household furnishings and operations, new vehicles, motor vehicle insurance, and education were among those that increased over the month.

There were some indexes that declined in August, including those for airline fares, communication, and used cars and trucks.

The good news is that US energy prices have eased.

The energy index fell 5.0% during August, thanks to a 10.6% plunge in gasoline prices during the month.

On an annual basis, the energy index was 23.8% higher than a year ago, down on July’s 32.9% jump.

The dollar is surging, wiping out the pound’s earlier gains.

Investors are anticipating America’s Federal Reserve will press on with hefty interest rate rises, to tame inflation.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

US inflation higher than hoped

Breaking: US inflation was higher than expected last month, dashing hopes that price pressures might have cooled more quickly.

The US consumer prices index rose by 8.3% in the year to August, down on July’s 8.5% – but missing forecasts of a drop to 8.1%.

On a monthly basis, prices increased by 0.1%, ahead of forecasts of a slight fall of 0.1%.

Although gasoline prices fell by 10%, the cost of shelter (housing), food, and medical care all rose, in a “broad-based monthly all items increase”.

More to follow.

Updated

Global economy may avoid recession as inflation risks ease, says JP Morgan

Easing inflationary pressures could help the world economy to avoid recession, analysts at JP Morgan suggest.

In a research note, dated Monday, JP Morgan says “Our expectation that the global economy will stay out of recession”.

They point to moderating inflation and wage pressures, rebounding growth indicators, and stabilizing consumer confidence.

Fiscal stimulus – such as China’s economic support measures, and the energy bill help being rolled out in Europe, could also support global growth.

They write:

The probability for soft landing has ticked up with moderating inflation and jobs prints, while at the same time, positioning remains at extreme lows.

Inflation should continue to roll over given the strong link to oil and gasoline prices.

Updated

Excitement is building in the markets ahead of the US August inflation report, in 30 minutes time.

The headline inflation rate is expected to drop to 8.1% in August, from 8.5% on the back of falling commodities, and lower gasoline prices.

On a monthly basis, US consumer prices may drop a little. That won’t stop inflation being much higher than a year ago – but it could be an important sign that inflationary pressures are easing.

Thanim Islam, market strategist at international business payments firm Equals Money, says core inflation will be important too:

The key data point will be the core inflation reading which strips out energy and food costs. The year-on-year print is expected to rise marginally to 6% from 5.9%, with the month-on-month print expected to come in at 0.3%.

Germany’s economy minister is also pushing for a windfall tax on energy firms’ excess profits, as Reuters explains:

Germany faces the threat of recession next year due to the stress placed on consumers and businesses by high energy prices, Economy Minister Robert Habeck said on Tuesday.

He said the government is striving towards market reform, with the goal to introduce a planned levy on energy firms’ excess profits retroactively for 2022.

Key event

Back in the UK, Ocado has been explaining how higher costs, mainly from energy and dry ice, would weigh on profits in its fourth quarter.

The cost of electricity is about three times what it was last year, and fuel costs for the year are expected to be about 15% higher. At similar levels of use, this adds £20-25m in costs.

The price of dry ice, used to transport frozen products such as ice-cream, has increased dramatically, which will add a further £15-20m in annualised costs, although the business is exploring alternatives to dry ice, or carbon dioxide. It is a by-product of fertiliser manufacture.

CEO Tim Steiner said the price had tripled from £200 to £600 during the war in Ukraine, and further shot up to £4,000 a kg more recently because of plant closures.

More here:

Updated

Germany’s economy minister, Robert Habeck, is also warning of a recession:

Marks & Spencer and Asda have become the latest retailers to confirm they will shut stores next Monday for the Queen’s funeral, PA Media reports.

M&S said it will also halt deliveries to customers on Monday September 19, which will be a bank holiday as the Queen’s state funeral takes place.

BDI industry group expects massive recession in Germany

The president of Germany’s BDI industry association expects a massive recession in Europe’s biggest economy, Reuters reports.

Siegfried Russwurm said today:

“We expect Germany to enter a massive recession.”

The BDI is the leading business group for German industry, and industry-related service providers, so its views carry weight. It warned three months ago that a halt in Russian gas deliveries would make recession inevitable.

BDI’s anxiety certainly fit with the glooomy mood among German investors, where confidence is being hit by fears of energy shortages (see earlier post).

Yesterday the IFO Institute slashed its forecast for Germany’s economic growth, and warned that Europe’s largest economy was heading into a winter recession.

IFO expects German economic output to shrink by 0.3 percent next year, down from a previous forecast of 3.7% growth. It said soaring energy costs caused by Russia’s throttling of gas supplies will reduce disposable income, leading to lower consumer spending, while manufacturers hit by the global slowdown.

Europe’s stock markets are higher this morning, as investors continue to welcome Ukraine’s successful counter-offensive in the northeast Kharkiv region.

The Stoxx 600 has gained 0.3%, adding to Monday’s rally.

In London, the FTSE 100 index is up 26 points at around 7,450 points, the highest in over two weeks.

Silver producer Fresnillo(+4%), hotel operator Whitbread (+2.4%) and betting group Flutter (+2.2%) are among the risers.

UK rents keep rising

The cost of living crisis is driving renters towards smaller properties such as flats, which may be more affordable to run.

Property website Zoopla has reported an increase in demand for smaller flats as people feel the cost-of-living squeeze, with fewer renters looking for two and three-bedroom houses.

Its report said:

“We have seen a steady reduction in the proportion of renters looking for two and three-bed houses, and an increase in demand for one and two-bed flats over 2021 and 2022. This trend has been accelerating in recent weeks.”

Rents are continuing to climb, as tenants suffer from a shortage of available properties.

Zoopla says the average rent has increased by £115 per month since last year, to reach £1,051 per calendar month. That is just over a third of the average income of a single earner.

Updated

UK wages will continue to be outpaced by inflation for the rest of this quarter, the NIESR economic institute warns.

It estimates that average weekly earnings will grow at 6.2% in the third quarter of this year, up from 5.5% in the three months to July (as we learned this morning). That’s still short of inflation, which hit 10.1% in July.

Paula Bejarano Carbo, data analyst at NIESR, warns that public sector workers will be worst hit (as we covered earlier):

Today’s ONS estimates suggest a growth in average weekly earnings, including bonuses, of 5.5 per cent – in line with our previous forecast. Despite this growth, real regular wages fell by 2.8 per cent in the three months to July, indicative of the intensity of inflationary pressure in the economy.

Strikingly, the figures today note the largest disparity in public and private sector wages recorded outside of the pandemic period, where private sector regular pay grew by 6 per cent while its public sector counterpart grew by 2 per cent. Workers in these sectors may well be asymmetrically equipped to deal with the ongoing cost of living crisis.”

Full story: Average UK food bill rises by £571 a year as grocery inflation hits record

Supermarket inflation reached a new record of 12.4% last month, adding £571 to annual household bills, with milk and butter seeing some of the biggest price rises.

The market research firm Kantar said the typical annual grocery bill has risen to £5,181 from £4,610. Milk, butter and dog food are among the items affected by the biggest increases, going up in price by 31%, 25% and 29% respectively in the four weeks to 4 September compared with a year earlier.

Sales of the very cheapest value own-label products were up by a third compared with a year ago, as customers try to cope with surging living costs. Overall spending on all retailer own-label lines was £393m higher during the four-week period, pushing own-label’s share of the market to 51.1%.

In the markets, the pound has hit a two-week high against the US dollar.

Sterling traded as high as $1.1732, ahead of today’s US inflation data which is expected to show that prices pressures cooled (with annual CPI expected to drop to 8.1%, from 8.5%).

The euro has also gained ground against the dollar, to $1.0165.

Raffi Boyadjian, lead investment analyst at XM, says efforts to fight the energy crisis are lifting the pound and the euro:

Even though there is a great deal of uncertainty about the likelihood of success of these emergency measures – the EU is still negotiating a final agreement, while the UK’s plan risks higher taxes in the future – they should nevertheless go some way in easing the pain on consumers and businesses.

And although there is still a high probability of a recession in both the euro area and the UK, the emergency packages should make a positive contribution to growth and were not part of the equation just a few weeks ago, hence, this relief rally in the two currencies.

Investors across the eurozone are also gloomier, as the energy crisis threatens to push Europe into recession.

Updated

German investor morale slips further on energy supply fears

Fears of energy shortages this winter have hammered confidence across German invesors, along with worries about China’s slowing economy.

The German economic sentiment index, tracked by the ZEW institute, has tumbled deeper into negative territory this month, as the economic stormclouds over Europe’s largest economy darkened.

It sank to -61.90 points in September, down from -55.3 in August, which ZEW says shows that “the economic outlook for Germany has deteriorated significantly”.

Businesses fear that Russian gas supplies will not resume, with the Nord Stream 1 pipeline remaining closed.

Investors’ view of the current situation, and of the outlook for the next six months, both deteriorated.

ZEW president, professor Achim Wambach, says:

The prospect of energy bottlenecks in winter makes the expectations for large parts of German industry even more negative. Added to this is a less favorable assessment of growth in China.

The current statistical figures already show a decline in incoming orders, production and exports.

Leaked paper reveals EU is unlikely to cap price of Russian gas

The EU executive is retreating from imposing a price cap on Russian gas, but pushing ahead with windfall taxes on energy company “surplus” profits, according to a leaked document, my colleague Jennifer Rankin reports.

A draft regulation on the “electricity emergency tool” seen by the Guardian contains neither a price cap on Russian gas nor on imported gas, after member states were unable to agree on restrictions last week.

The EU is expected to levy windfall taxes on the high profits of fossil fuel companies, with a separate cap on revenues of low-carbon electricity producers.

The European Commission president, Ursula von der Leyen, is expected to publish Europe’s plan on dealing with surging electricity prices when she makes her annual state of the union speech on Wednesday.

The final text could still change, but the draft reveals the Commission’s doubts over gaining enough support from EU member states for its preferred option of putting a cap on Russian gas in response to what it has called the Kremlin’s weaponisation of supply.

Here’s the full story:

Overlapping strikes at Liverpool and Felixstowe

Felixstowe’s workers aren’t the only ones striking in a wage dispute.

More than 560 dockworkers at the Port of Liverpool, one of the country’s largest container docks, are set to go on strike for two weeks from September 20th (a week today) after rejecting a pay offer.

That walkout will overlap with the new strike in Felixstowe, which starts the following week.

Bloomberg has more details:

In Liverpool, organizers said members turned down Peel Ports Ltd.’s proposal of a 7% wage increase and a one-time payment of £750 ($875).

Peel is urging the Unite union to keep negotiating, saying a shutdown will be felt “for many months to come, at a time when container volume demand has started to reduce,” according to a statement on its website.

Updated

Felixstowe Port: No prospect of agreement with union

The port of Felixstowe has confirmed it has received notice from Unite that further strike action will take place from September 27 to October 5.

A notice on its website states the port is implementing a 7% pay rise and a £500 payment.

Hutchison Ports says:

We are very disappointed that Unite has announced this further strike action at this time. The collective bargaining process has been exhausted and there is no prospect of agreement being reached with the union.

The port is in the process of implementing the 2022 pay award of 7% plus £500 which is backdated to 1 January 2022.

A second strike at Felixstowe will cause delays and disruption, says Unite national officer for docks Bobby Morton:

“The latest strike action is entirely of Felixstowe’s own making. Rather than seeking to negotiate a deal to resolve the dispute, the company instead tried to impose a pay deal.

“Further strike action will inevitably lead to delays and disruption to the UK’s supply chain but this is entirely of the company’s own making.”

Fresh eight-day strike announced at Felixstowe

A new eight-day strike has been announced at the UK’s largest container port, Felixstowe, as a pay dispute deepens.

The Unite union have announced that the strike will begin at 7am on Tuesday 27th September, and run until 06:59 on Wednesday 5th October.

Unite says workers have “overwhelmingly rejected” management’s attempt to impose a pay deal worth 7%, which is a real terms pay cut.

Felixstowe handles almost half the container freight which enters the UK, with around 17 different shipping lines operating to and from 700 ports.

The strike could cause fresh disruption to UK supply chains, as retailers try to stock up on goods ahead of Christmas.

Unite general secretary Sharon Graham said:

“Felixstowe and CK Hutchison [the port’s owner] are both eye-wateringly wealthy but rather than offer a fair pay offer, they have instead attempted to impose a real terms pay cut on their workers.

“Since the beginning of this dispute Unite has given its total support to its members at Felixstowe and that will continue until this dispute is resolved.”

Workers at the port rejected the imposed 7% pay offer by 82%, on a 78% turnout, Unite says.

Unite’s members have already held one eight-day walkout, at the end of August, involving around 1,900 crane drivers, machine operators and stevedores.

ING: Pressures on the NHS leading to more long-term sickness

The relentless pressures on the National Health Services are contributing to the rise in people unable to work due to long-term sickness, analysts say.

Today’s jobs report shows that there are 352,011 more people out of work due to long-term illness than in December 2019-February 2020.

James Smith, ING’s developed markets economist, says the ‘dramatic rise’ in people leaving the labour market, due to illness (see earlier post), is ‘linked to pressure in the NHS’:

At a headline level, the latest UK jobs numbers don’t look too bad. Unemployment fell by two-tenths of a per cent to 3.6%, the lowest level since 1974. But this is driven not by an increase in the number of people in employment, but primarily by another dramatic rise in those classified as inactive – that is neither in work nor actively seeking it.

Alarmingly, the number of people classifying as not working due to long-term sickness is up by almost 400,000 since late 2019, and almost 150,000 in the last two months’ worth of data alone. It’s hard to escape the conclusion that this is linked to the pressures in the NHS.

UK labour market report
UK labour market report Photograph: ING

Record NHS waiting lists have forced millions of patients are being forced to pay for private healthcare, new data shows….

….but NHS staff have also been praised for cutting the backlog of patients waiting two years for routine surgery, which hit 22,500 at the start of this year.

Updated

Full story: UK pay growth lags behind inflation as cost of living crisis bites

Pay growth failed to keep pace with rising prices in July despite a jump in average wages, according to official data that showed the cost of living crisis continued to affect millions of households throughout the summer.

Average pay including bonuses rose by 5.5% in the three months to July while regular pay (excluding bonuses) increased by 5.2%, up from 4.7% in June.

Workers continued to be hardest hit in the public sector, where regular pay grew by 2%, compared with 6% in the private sector. Annual inflation was 10.1% in July, the highest level in 40 years.

The growth in wages came against a backdrop of falling unemployment, which declined to its lowest level since 1974, but the trend for wages to trail inflation was maintained

Britain’s two German-owned discount supermarket chains have broken the Big Four’s grip of the grocery sector, with Aldi officially overtaking Morrisons for market share.

Kantar’s Fraser McKevitt explains:

Back at the start of the 2010s, Tesco, Sainsbury’s, Asda and Morrisons together accounted for over three quarters of the sector but that traditional big four is no more.

The discounters have seen dramatic sales increases in recent months, bringing more and more customers through their doors.

Aldi has done well to expand its shopper base, supported by consistent store openings, and with 14.2 million consumers visiting the grocer in the past three months. Meanwhile, for the fourth month in a row Lidl was the fastest growing grocer and recorded its strongest sales performance since October 2014.

UK grocery market inflation hits record 12.4%

Supermarket inflation has soared to 12.4%, as households continue to be battered by rising costs.

Grocery price inflation hit a fresh record in the last month, adding over £570 to the average annual bill, according to market researcher Kantar.

This has encouraged more customers turn to discount retailers, as they try to manage their stretched budgets (as wages aren’t keeping up with prices).

Fraser McKevitt, head of Retail and Consumer Insight at Kantar’s Worldpanel Division, warns that “it seems there’s no end in sight to grocery inflation”.

McKevitt says:

Now standing at 12.4% for August, the latest figure means that the average annual grocery bill will go from £4,610 to £5,181 if consumers don’t make changes to what they buy and how they shop to cut costs.

That’s an extra £572 a year. Categories like milk, butter and dog food are jumping up especially quickly at 31%, 25% and 29% respectively.

Kantar also reports that German-owned discounter Aldi has overtaken Morrisons to become Britain’s fourth-biggest supermarket group.

Aldi’s sales rose by 18.7% over the 12 weeks to 4 September 2022, reaching a 9.3% market share and making it Britain’s fourth largest supermarket for the first time.

Meanwhile Lidl grew sales by 20.9% and its market share has increased to 7.1%.

Updated

Ocado shares slide as customer cut back

In the City, shares in online grocer Ocado have tumbled almost 10% after it warned customers are cutting back.

My colleague Julia Kollewe explains:

Ocado has warned that annual sales will drop because customers are trading down to value products and buying less overall amid a worsening cost-of-living crisis.

The online grocer, which is owned partly by Marks & Spencer, said sales rose 2.7% from a year ago in the 13 weeks to 28 August, an improvement from the drop in the previous quarter.

However, faced with soaring energy bills and higher food prices, shoppers are putting less in their baskets and looking for cheaper products. The value of the average basket fell 6%, from £123 to £116.

Here’s the full story:

Updated

We’re now starting to see signs of a labour market losing its momentum, warns Jack Kennedy, UK economist at the global job site Indeed, with the employment rate and vacancy numbers both dipping.

He adds:

“At the same time, there remains extreme tightness with vacancies nonetheless remaining near record levels and economic inactivity reversing its recent falls to rise to its highest level since 2016. This was caused by people at opposite ends of the career ladder; largely driven by those aged 16 to 24 years and those aged 50 to 64 years. This participation gap in the labour market means hiring became even more challenging for employers.

“While many people’s thoughts may be elsewhere at the moment, the cost-of-living crisis continues to be reflected in a squeeze on real terms pay. Despite historically strong nominal regular pay growth, real wages were down -2.8% on the year - one of the largest falls on record.

“The squeeze on public sector workers is particularly acute as their regular wages increased by just 2% year-on-year in nominal terms compared with 6% for private sector workers, the largest gap on record outside of the pandemic period.”

Real wages fell by around 4% when compared to the CPI inflation measure, warns TUC General Secretary Frances O’Grady:

She says ministers must take action to boost pay:

“Every worker deserves a decent standard of living.

“But as the cost-of-living crisis intensifies, millions of families don’t know how they will make ends meet this winter.

“The new prime minister must get pay rising. Boosting the minimum wage and giving public sector workers a decent pay rise would be a good start.

“And unions should be allowed to go into every workplace to negotiate proper pay rises for all working people.”

Rise in long-term sickness should ring alarm bells

Long NHS waiting lists, poor mental health, a lack of specialist employment support and long Covid are all driving up the rise in long-term sickness (see last post).

That’s according to Tony Wilson, Director at the Institute for Employment Studies, who said:

“Today’s figures should be sounding alarm bells in government, with the number of people out of work due to long-term ill health now rising faster than at any point in at least three decades.

This is happening despite there being well over a million vacancies in the economy and unemployment at its lowest in most of our lifetimes. Yet there are still more than half a million more people out of work than there were before the pandemic began and firms simply can’t find the workers to fill their jobs. This is holding back growth but also pushing up inflation, with pay growth in the private sector now running above 6% and contributing to even higher prices. Of course inflation is even higher still, which combined with anaemic public sector pay means that earnings in real terms have fallen for the ninth month in a row.

“This weak jobs recovery is being driven by more people out of work due to long-term ill health, up by 350 thousand since the pandemic and by 130 thousand in the last three months alone. NHS waiting lists, poor mental health, a lack of specialist employment support and long covid will all be playing a part in this, but whatever the reasons we need to do far more to help those with ill health to prepare for, find and keep work.

For a government that wants to cut taxes to boost growth, today’s figures also spell trouble. If we don’t do more to help more people into work, then any tax cuts will just lead to even higher inflation and higher interest rates for longer.”

IoD: disturbing rise in inactivity as long-term sickness rises

The drop in the unemployment rate, to just 3.6%, shows some firms are facing labour shortages (even as vacancies fall).

Kitty Ussher, Chief Economist at the Institute of Directors, says long-term illness is preventing some people working:

“Just when we thought unemployment couldn’t get any lower, it has fallen further to an extraordinary 3.6% in the 3 months to July, the lowest rate since 1974.

“This is good news for households trying to budget in the face of rising costs. Although the effect of inflation has caused real pay to fall - by 2.8% on the year, causing difficulties for many - the jolt to family budgets from high unemployment would be significantly worse.

“More disturbing is the continuing rise in economic inactivity. Some of this is due to having more students, but also to increasing numbers of over-50s being denied the ability to work due to long-term illness.

Uk economic inactivity

There are now 642,00 more people classed as economically inactive, compared with February 2020 (just before the first Covid-19 lockdowns).

Changes in economic inactivity

Real pay packets could be squeezed harder in the months ahead as the economy weakens.

Yael Selfin, chief economist at KPMG UK, says:

“Pay packets continue to be squeezed as nominal pay growth hasn’t kept up with soaring inflation. As long as demand for staff remains high, this could encourage workers to look for better opportunities and secure a higher pay elsewhere.

However, the window of opportunity could soon narrow if employers review their payrolls in light of a deteriorating outlook.”

Updated

Glassdoor: labour market feeling an autumn chill

Glassdoor’s UK economist Lauren Thomas says:

“The ONS’s latest labour market report tells us that summer’s red-hot labour market is starting to feel an autumn chill, with vacancies down for the second month in a row after nearly two years of nonstop growth.

One notable bright spot for employees: the healthcare sector, where openings are still high. Employers struggling to hire should focus on the over 65s, whose employment rates are tied for the second-highest on record.

Students are another possibility to focus on; they’ve driven a large share of the rise in economic inactivity during the pandemic, but many will be returning to the labour market after their programmes end.

UK vacancies

The drop in people working, or available to work, in May-July was largely driven by those aged 16 to 24 years and those aged 50 to 64 years.

The ONS says:

Looking at economic inactivity by reason, the increase during the latest three-month period was driven by those inactive because they are students or long-term sick.

Public sector pay packets hit hardest by inflation

Public sector workers are suffering the brunt of the real wage squeeze.

Today’s labour market report shows that average regular pay in the public sector rose by just 2.0% per year in May-July.

Private sector workers saw their pay rise three times as fast – with average regular pay growth of 6.0% (still lagging inflation).

That’s the largest difference between public and private sector pay on record (apart from in the pandemic, when private sector pay tumbled in the first lockdown).

UK public sector and private sector pay
UK public sector and private sector pay Photograph: ONS

Workers in the wholesaling, retailing, hotels and restaurants sector saw the largest regular growth rate at 7.0%, as bosses continued to offer higher wages to attract staff.

That was followed by the finance and business services sector at 5.9%, and construction sector at 5.4%.

Here’s Alex Collinson, analysis and research officer at the TUC:

Updated

Introduction: Real wages still falling, but jobless rate lowest since 1974

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

UK wages are continuing to lag behind inflation, as the cost of living squeeze hit British workers over the summer.

The latest UK labour market report, just released, shows that real pay is still falling, even as the jobless rate hits a new near-50 year low.

Average pay including bonuses rose by 5.5% per year in May-July, while basic pay, excluding bonuses, rose 5.2%, the Office for National Statistics reports.

Although that’s quite high in nominal terms, the ONS says it’s one of the worst drops in real pay this century:

Based on its CPIH inflation measure, the ONS says:

Growth in total and regular pay fell in real terms (adjusted for inflation) on the year in May to July 2022, at 2.6% for total pay and 2.8% for regular pay; this is slightly smaller than the record fall we saw last month (3.0%), but still remains among the largest falls in growth since comparable records began in 2001.

UK real pay
UK real pay Photograph: ONS

The headline CPI inflation is higher that CPIH. It hit 10.1% in July, and could remain high for months – despite the government’s energy price cap announced last week.

The jobs report also shows that firms are also cutting back on hiring, as the energy crisis pushes the UK economy closer to recession.

The number of job vacancies in June to August fell by 34,000 to 1,266,000, the largest quarterly fall since June to August 2020.

But in better news, the total number of workforce jobs in the UK has risen by 290,000 to a record 35.8 million. This means it has exceeded the pre-coronavirus level of December 2019 for the first time.

The UK unemployment rate is now the lowest since May to July 1974 – the ONS reports it dropped to 3.6% in the three months to July, down from 3.8% in the previous quarter.

But the economic inactivity rate has risen by 0.4 percentage points to 21.7%, as more people dropped out of the labour market in May-July.

That’s 1.5 percentage points higher than before the coronavirus pandemic, showing the long-term impact of Covid-19 on the labour force.

More details and reaction to follow….

Also coming up today

UK business are preparing for the Queen’s state funeral. A string of retailers, including Aldi, John Lewis, Waitrose, Primark and Homebase have decided to shut stores next Monday…

… while London hotel rates have soared, in line with surging demand from foreign dignitaries, and members of the public keen to pay their respects.

In economics….investors are hoping to learn today that the pace of US inflation may have slowed last month.

US CPI is expected to have slowed in August, for the second month running, to an annual pace of around 8.1%, down from 8.5% in July.

Prices may have dropped by 0.1% on a monthly basis during August, thanks to a drop in energy costs (gasoline has been falling steadily for weeks), having been flat in July.

But core inflation, which strips out volatile measures such as energy, is expected to have risen 0.3% during the month.

A slowdown in inflation could take some pressure off America’s central bankers, who are expected to raise interest rates by another 75 basis points (three-quarters of a point) at the their next meeting.

European stock markets are set to open lower, after strong gains yesterday after Ukraine’s sweeping advances against Russia eased some investor fears of a prolonged energy crisis in Europe.

The agenda

  • 7am BST: UK labour market report

  • 8am BST: Kantar’s grocery inflation report

  • 10am BST: ZEW index of German economic sentiment

  • 1.30pm BST: US inflation report for August

  • 3pm BST: TIPP survey of US economic optimism for September

Updated

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