Finance

Millions hit by cost of living squeeze as BoE warns against high pay and price rises – business live


Deprived households cut back the most

The ONS’s cost of living survey also shows clearly that the most poorest households are suffering more than wealthier ones.

Those in the most deprived areas were more likely to have reduced spending on food and essentials.

The ONS says:

Among those who had seen cost of living increases, those living in the most deprived fifth of areas in England were more likely to have cut back on food and essentials (42%) than average (35%).

Meanwhile, those in the least deprived fifth of areas were less likely (27%).

Cutting electricity and gas use was more common than average among those who were earning between £10,000 and £15,000 per year (56%), and less common among those earning more than £50,000 per year (44%).

Those living in the most deprived areas more likely to be using credit too — at 18%, compared with just 8% of those living in the least deprived areas.

Also, those living in rented housing whose cost of living had gone up were more likely to have reduced their spending on food and essentials (46%) than those who own their homes outright (27%) or are paying off a mortgage (33%)

Matt Whittaker of Pro Bono Economics has tweeted the key findings, and says it shows the need for targeted support.

More from the deeper @ONS dive into household experiences of the cost of living crisis here. Clear that this is a broadly felt squeeze, but one that is significantly tighter for some. Means our response needs to be large, but also targeted https://t.co/H3Z1eTz4CW pic.twitter.com/KblmZtYE6n

— Matt Whittaker (@MattWhittakerPB) August 5, 2022

Key events

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Despite the painful squeeze already being felt by millions, there’s no sign of immediate support from the government.

UK business secretary, Kwasi Kwarteng, has admitted it will be more than a month before ministers can introduce any measures to tackle the rising cost of living.

Kwarteng, who is backing the foreign secretary, Liz Truss, to become the next leader of the Conservative party, said he was expecting a a new prime minister to introduce a “support package” in an emergency budget but it could not happen until after they start work next month.

Here’s the story, by my colleague Emily Duggan:

The news that sixteen million people have cut back on food and essentials shows that households are already taking “difficult decisions”, says Laura Suter, head of personal finance at AJ Bell.

Suter explains (via Sky News):

“The cost of living crunch means certain groups feel the pinch more than others. Disabled people are more likely to have to cut back on food and essentials, as are people living in deprived areas.

“Those renting are also more likely to have slashed their spending, with many citing rising housing costs as one of the key factors contributing to their rising living costs.

However, as more homeowners come off their cheap fixed rate mortgages and roll on to pricier deals we’ll likely see them feel the crunch more too.”

Deprived households cut back the most

The ONS’s cost of living survey also shows clearly that the most poorest households are suffering more than wealthier ones.

Those in the most deprived areas were more likely to have reduced spending on food and essentials.

The ONS says:

Among those who had seen cost of living increases, those living in the most deprived fifth of areas in England were more likely to have cut back on food and essentials (42%) than average (35%).

Meanwhile, those in the least deprived fifth of areas were less likely (27%).

Cutting electricity and gas use was more common than average among those who were earning between £10,000 and £15,000 per year (56%), and less common among those earning more than £50,000 per year (44%).

Those living in the most deprived areas more likely to be using credit too — at 18%, compared with just 8% of those living in the least deprived areas.

Also, those living in rented housing whose cost of living had gone up were more likely to have reduced their spending on food and essentials (46%) than those who own their homes outright (27%) or are paying off a mortgage (33%)

Matt Whittaker of Pro Bono Economics has tweeted the key findings, and says it shows the need for targeted support.

More from the deeper @ONS dive into household experiences of the cost of living crisis here. Clear that this is a broadly felt squeeze, but one that is significantly tighter for some. Means our response needs to be large, but also targeted https://t.co/H3Z1eTz4CW pic.twitter.com/KblmZtYE6n

— Matt Whittaker (@MattWhittakerPB) August 5, 2022

The cost of living squeeze is having a devastating impact on disabled people, warns Scope, the disability equality charity, even before the energy price surge this winter.

Tom Marsland, policy manager at Scope, says today’s ONS’s Cost of Living survey highlights the need for more support:

“These stark findings show millions have already had to cut back, with disabled people hardest hit – even before October’s terrifying energy price hikes have come into force.

“Scope has been inundated with calls from disabled people who have been forced to make dire cutbacks on personal care, hygiene, food and energy because of rampaging inflation.

“This is having a devastating impact on disabled people’s lives, and the support from government just won’t touch the side.

“Life costs more if you’re disabled, which is why the government must get more financial support to disabled people now, to stop millions being pushed deeper into destitution.”

Around 9 in 10 (89%) people continued to see an increase in their cost of living in the week 20 to 31 July 2022 – or around 46 million of us – according to the latest data from our Opinions and Lifestyle Survey https://t.co/shq38M8EXy

— Office for National Statistics (ONS) (@ONS) August 5, 2022

Today’s ONS reports shows that disabled people were more likely than non-disabled people to have reduced their spending on food and essentials because of their increased costs of living (42%, compared with 31%).

Mark Sweney

Mark Sweney

WPP’s logo
Photograph: Simon Dawson/Reuters

In the City, shares in advertising giant WPP have slumped more than 7% after investors reacted to concerns over the strength of the ad market next year as the global economy weakens.

The London-based marketing services giant is the top faller on the FTSE 100, with more than £700m wiped off its market value, despite beating analyst consensus for performance in the second quarter and joining peers in raising full year targets.

WPP reported organic revenue growth of 8.2% in the second quarter – well ahead of City expectations of 5.5% growth. The company reported double digit revenue growth in the US, the world’s largest ad market, and Germany in the second quarter with the UK growing at 6.2%.

The strong performance prompted the company to raise its underlying growth forecast for this year by 0.5% to a range of 6% to 7%, similar to US rivals Omnicom and Interpublic and France’s Publicis which have already reported solid results.

However, Mark Read, the chief executive of WPP, admitted that there is a “more uncertain economic environment ahead” in 2023.

WPP said it was “confident” of sticking to its target of organic revenue growth of 3-4% and headline operating profit margin of 15.5-16% next year, but said it would not confirm official guidance for 2023 until February.

Investors are taking this unwillingness to give a concrete forecast as a potential sign that the market could weaken, sending WPP’s shares down more than 7%. The company’s shares are down 14% in the last year.

Thomas Singlehurst, analyst at Citi, says:

“There is a lot of scepticism out there over the outlook for the advertising sector.

Full story: Workers asking for pay rises risk embedding inflation, says Bank boss

Mark Sweney

Mark Sweney

Workers should refrain from asking for inflation-matching pay rises, according to the governor of the Bank of England, who warned there was a risk of inflation becoming “embedded”.

Andrew Bailey, who added that he does not expect interest rates to settle at pre-financial crisis levels of about 5%, refused to be drawn on what an appropriate pay rise would be, a day after he warned inflation would hit 13% in October. The Bank’s inflation target is 2%.

“If everybody tries to beat inflation – and that is in both price-setting and wage-setting – it doesn’t come down, it gets worse,” he said, speaking to BBC Radio 4’s Today programme on Friday.

“My key point is, if inflation becomes embedded and persistent, it gets worse. And the effects get worse.”

The UK is embroiled in a summer of strikes by workers in industries from rail and aviation to post and telecommunications as unions attempt to secure increases to allow members to keep wages in line with inflation levels running at a 40-year high.

More here:

Households have been warned that the average energy bill could climb to nearly £4,000 a year from January, higher than some previous forecasts.

Auxilione, a small energy consultancy, has predicted that the energy price cap in Great Britain will be lifted to £3,488 per year from October, and then against to £3,994 at the quarterly change in January 2023.

Predictions for January are still uncertain as there are more than three months left until the price is decided.

October’s prediction is likely to be more accurate (Ofgem should release the new price cap later this month – it’s currently £1,971 per year).

The research firm Cornwall Insight, who have a good track record on the price cap, predicted earlier this week it could hit £3,615 a year from January.

Last month BFY, a management consultancy, predicted a typical energy bill could reach £3,850 a year by January.

The important issue is that the government’s existing package of support will be inadequate for struggling households, as Resolution Foundation warned (see opening post).

What do today’s @bankofengland announcements mean for households? Average real post-tax household incomes are expected to fall by around £2,000 across this year and next. The Government will inevitably need to do more to shield families from the worst effects of this crisis. pic.twitter.com/NN1AxQ5152

— Resolution Foundation (@resfoundation) August 4, 2022

It’s become clear this week that Andrew Bailey and Liz Truss have very different views about how to handle inflation and the economic crisis.

That suggest there could be significant tensions between Downing Street (should Truss beat Rishi Sunak) and Threadneedle Street as the economy slides into recession – a situation where you want monetary and fiscal policymakers to work together.

Particularly with some newspapers (notably today’s Daily Mail) blaming Bailey for not reacting faster last year.

ITV News’s Joel Hills sums up the situation:

Andrew Bailey is from Mars, Liz Truss is from Venus.

The Bank of England’s narrative about why inflation is high and rising and how it can be tamed appears to be very different to that of the current favourite to become the next PM.

This is a little concerning… 🧵

— Joel Hills (@ITVJoel) August 5, 2022

The Bank argues that inflation will hit 13% in October largely because Vladimir Putin has caused energy prices to spike to dizzying, astonishing, ruinous levels and that this is something it is powerless to prevent.

— Joel Hills (@ITVJoel) August 5, 2022

The Bank calculates that for it to have kept inflation anchored at 2% in the last year it would have had to 1) anticipated the Russian invasion of Ukraine and 2) raised interest rates “miles into double digits”, creating an even bigger recession than the one we now face.

— Joel Hills (@ITVJoel) August 5, 2022

The Team Truss take is different. They argue the Bank is in part to blame for spiralling prices, suggesting its failure to act earlier and more decisively by raising interest rates means the cost of borrowing will now have to increase by more than it otherwise would have done.

— Joel Hills (@ITVJoel) August 5, 2022

The Daily Mail shares this opinion.

The Bank believes the worst cost of living squeeze for 60 years (driven by runaway prices not tax rises) will knock such a huge hole in the disposable incomes of UK households and firms that a recession of some description is now inevitable.

— Joel Hills (@ITVJoel) August 5, 2022

The Bank is raising interest rates – and in doing so will intensify the squeeze – because it says it sees signs that inflation is starting to feed itself domestically and it needs purging. A downturn and higher unemployment are regrettable but necessary consequences.

— Joel Hills (@ITVJoel) August 5, 2022

Liz Truss claims a recession can be averted. She blames Rishi Sunak’s tax rises for sagging economic growth and argues that if she becomes prime minister growth can be revived by the immediate implementation of a package of tax cuts worth more than £30 billion.

— Joel Hills (@ITVJoel) August 5, 2022

If the Bank is right then rampant inflation + looming recession will make tax cuts much harder to deliver. Indeed, the next PM will likely have to prioritise greater spending on yet more financial support for struggling households and vital public services like the NHS.

— Joel Hills (@ITVJoel) August 5, 2022

Bailey and Truss appear to have two very different world views. Regardless of which one you find most credible, it’s hard to see how they can be easily reconciled should Truss win the leadership contest.

In months ahead we really need monetary and fiscal policy in harmony.

— Joel Hills (@ITVJoel) August 5, 2022

Here’s a video clip of business secretary Kwasi Kwarteng criticising the Bank of England’s control of inflation this morning (see earlier post), saying ‘clearly something’s gone wrong’ as inflation heads towards 13%.

‘Something’s gone wrong’: Kwasi Kwarteng criticises Bank of England – video

Millions cut back on energy, food and essentials

Around 24 million people in Great Britain have been cutting energy use in their home, while 16 million cut back on food and essentials, the Office for National Statistics has warned.

The ONS’s latest cost of living survey has found that nine in 10 adults in Great Britain said their cost of living has increased, as rising inflation hammered household incomes.

The most common causes were:

  • an increase in the price of their food shop (94%)
  • an increase in gas or electricity bills (82%)
  • an increase in the price of fuel (77%)

Faced with these price rises, millions of families are cutting spending where they can, running down their savings, or borrowing more on credit.

More than a third of those whose cost of living had gone up cut back spending on food and essentials (equal to around 16 million people).

Almost a quarter (23%, around 11 million people) used savings to cover costs, and 13% (around 6 million people) said they were using more credit than usual.

Grim and unsurprising findings in latest @ONS household finance update. Proportions reporting increases in cost of living, reduced capacity to save and reduced capacity to meet emergency costs remain elevated. But upward drift in proportion using credit to cope is a big concern pic.twitter.com/if4LdM3Vif

— Matt Whittaker (@MattWhittakerPB) August 5, 2022

The survey also found that people are:

  • spending less on non-essentials (57%, around 26 million people)
  • using less gas and electricity in their home (51%, around 24 million people)
  • cutting back on non-essential journeys in their vehicle (42%, around 19 million people)

In terms of the drivers of cost of living increases, respondents are feeling it across a number of areas. 84% say the cost of their food shop has increased, 73% point to rising domestic fuel costs. And 69% highlight rising transport fuel costs pic.twitter.com/s8460feD25

— Matt Whittaker (@MattWhittakerPB) August 5, 2022

Breaking away from the UK economic crisis briefly… Britain’s financial watchdog has fined City veteran Sir Chris Gent £80,000 for disclosing inside information.

The Financial Conduct Authority (FCA) said Gent, the former chair of medical products maker ConvaTec Group, had told two of ConvaTec’s major shareholders about two announcements, before the information had been announced properly to the market

They related to an expected revision of ConvaTec’s financial guidance and the CEO’s plans for retirement.

We consider Sir Christopher acted negligently in disclosing inside information to individuals at two of ConvaTec’s major shareholders before it was properly announced to the market https://t.co/SWJKCfgeWb

— Financial Conduct Authority (@TheFCA) August 5, 2022

Gent, a former chief executive of mobile network giant Vodafone, had acted negligently in disclosing the information, says the FCA.

But there’s no evidence he traded on the information or that he intended to make personal gain, or avoid loss, from making the disclosures.

wow – The FCA has fined Sir Christopher Gent, former non-executive chairman of ConvaTec Group Plc, £80,000 for unlawfully disclosing inside information. https://t.co/DwRrVQdm22

— Tony Tassell (@TonyTassell) August 5, 2022

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, says:

‘Private disclosure of inside information, especially by the Chairman of a listed issuer, risks investor confidence and the integrity of financial markets.

Sir Christopher failed to properly apply his mind to the question of what information he could properly disclose.

The Bank of England’s chief economist says the Bank is trying to keep its options open over future interest rate moves.

Huw Pill has told Bloomberg TV that the BoE wants to “ensure there’s an element of flexibility” over borrowing cost changes, so people shouldn’t assume rates will rise by another 50 basis points at its next meeting.

Given the uncertainties we face, I think we need flexibility either to go further, or to stay where we are, and the pace at which we go further to be varied according to circumstances”

But will rising interest rates hit house prices, as it pushes up mortgage costs?

Pill says the Bank expects the housing market to cool, but doesn’t foresee a ‘dramatic downturn’.

World food prices fall, helped by Ukraine wheat deal

We have some good news in the global battle against soaring inflation.

World food prices dropped significantly in July, according to the United Nations food agency’s world price index, further below their record highs after the Ukraine invasion began.

The UN’s Food and Agricultural Organization says the Black Sea export deal agreed between Russia and Ukraine last month was a key factor.

Its Cereal Price Index dropped by 11.5% last month, with wheat leading the price falls.

World wheat prices dropped by as much as 14.5%, FAO said, partly in reaction to the Russia-Ukraine deal on grain exports from key Black Sea ports, and also because of seasonal availability from ongoing harvests in the northern hemisphere.

Prices of vegetable oil, sugar and meat also dropped, pulling the FAO’s index of the most globally traded food commodities down to 140.9 points last month, from 154.3 in June.

But, the FAO warned that the bleak global economic outlook could threaten food security.

“The decline in food commodity prices from very high levels is welcome, especially when seen from a food access viewpoint,” said Maximo Torero, FAO Chief Economist.

“However, many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security.”

Here’s Helen Goodman, professor in practice at Durham University’s School of Government and International Affairs, on this morning’s interviews:

The Bank has come under fresh political fire this morning, from business minister Kwasi Kwarteng.

Kwarteng, who is backing Liz Truss, argues that the Bank was too slow to respond to rising inflation in 2021.

Kwarteng told Sky News:

“There is an argument – and I think it’s a strong one – to say that inflation was an issue that was identified at the beginning of last year.

“If your target is 2% and you’re predicting 13%, something’s gone wrong. And you’ve got to look at how the bank is organised and what the what the targets are,”

Inflation was just 0.4% in February 2021, when the UK was still in a Covid-19 lockdown. But it then started climbing, and by May 2021 was above the Bank’s 2% target.

However, the BoE resisted raising interest rates until its final meeting of 2021, worried that unemployment would jump when the furlough scheme ended that autumn.

UK inflation

Asked whether the BoE would keep its independence in a Truss-led government, Kwarteng said:

“It’s absolutely going to keep its independence.”

And Kwarteng also argued that cutting the tax burden, as Truss plans, will help:

“I’ve never understood why if we’re going to help people, how are we going to help people by putting up their taxes? Especially when their daily shop, their costs, are going up.

“What’s very clear to me from what the Bank of England said yesterday is that more of the same, just simply carrying on with our economic policy at the moment, is not going to cut it, it’s not going to help us get out of this difficulty.”

Andrew Bailey also says he doesn’t know what ‘normal’ interest rates will be in future, but they’re not going back to their levels before the 2008 financial crisis.

And he argues the Bank’s plan to start selling government bonds purchased under its £895bn quantitative easing programme will not have a ‘big impact’ on the cost of government borrowing.

“We don’t think that the rolling back of QE and the sale of assets is going to have a big impact on market interest rates”

BoE governor warns against high pay rises and price increases

The Bank of England governor has urged workers and businesses to resist pushing for high wage and price increases to match inflation.

He tells the Today Programme this would fuel inflation and hurt the least well off in society, in a signal to both companies and unions.

Q: What’s an inflationary pay rise in the current climate?

Andrew Bailey says there isn’t a specific number, but if everyone tries to beat inflation in both price setting and wage setting then it won’t fall.

If everyone tries to beat it, it doesn’t come down, it gets worse, that’s the problem.

The second problem, is that those who are worst hit by inflation are the poorest, who don’t have the bargaining power to protect themselves.

Bailey says:

“I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power.

I think that is something that, you know, I would say broadly we all have to be very, very conscious of.”

Q: So that’s your message is that those who do have the muscle….

Bailey explains that the current inflation shock is particularly bad for people on low-incomes as it is concentrated in food and energy — essential staples for us all.

I think there is a role in society to reflect on the fact that there are people who do not have the same ability to offset the effects of inflation, and they are going to be very badly affected by this.

Bailey: Firms aren’t struggling to raise prices

Q: What’s the point in raising interest rates, if the inflationary shock is coming from global energy and food prices?

Bailey says the real risk is that inflation becomes embedded, following a domestic shock and a fall in the labour market over the last two years.

Firms are telling him that they’re struggling to find workers, and not finding it hard to raise prices.

The economy is ‘still robust’ in the eyes of businesses, he says, and if inflation becomes embedded it becomes worse.

Bailey says:

The first thing they want to talk to me about is that businesses have trouble hiring people, and that is still going on. They’re also saying to us actually they’re not finding it difficult to raise prices at the moment.

That can’t go on.





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