Price rises slowed for the fifth month in a row in the four weeks to 6 August, the market research group Kantar reported.

Fraser McKevitt, the head of retail and consumer insight at Kantar, told the Guardian that the 2.2% point reduction in the pace of price rises was the second sharpest month-on-month fall in inflation it had recorded since 2008.

“Prices are still up year on year across every supermarket shelf, but consumers will have been relieved to see the cost of some staple goods starting to edge down compared with earlier in 2023. Shoppers paid 1.50 pounds for four pints of milk last month, down from 1.69 pounds in March, while the average cost of a litre of sunflower oil is now 2.19 pounds, 22 pence less than in the spring,” McKevitt said.

Shoppers have also continued to find ways to offset the impact of inflation on their household budgets by switching to supermarkets’ own-label products. Sales of own-label items rose 9.7% over the four-week period, compared with a 6.4% rise in branded products, Kantar data observed further.

The consumer group Which? has called on supermarkets to stock more of their cheapest own-label products in small local stores as it found that some branded food and drink products at supermarkets had more than doubled in price in 2022.

“Mr Kipling chocolate slices and Bakewell cake slices topped its price increase league with a 129.4% and 98% jump in a year. Yeo Valley yoghurts, Quaker porridge products and Tropicana orange juice also saw price rises of over 55%,” commented the Guardian report.

The hunt for better supermarket deals has reportedly boosted discounters like Aldi and Lidl, as these grocery chains have continued to take a bigger share of spending from their rivals, thus recording the fastest pace of growth in the market, according to Kantar.

“Aldi’s sales rose 21.2% and Lidl’s 19.8% in the 12 weeks to 6 August, compared with 9.5% at Tesco, the fastest growing of the traditional chains,” the market research group stated further.

Asda’s sales rose 7.7% over the four weeks, according to Kantar, a slight slowdown in growth from that reported in the previous month as inflation across the market eased.

However, Asda’s latest figures showed that sales, excluding fuel, had risen 9.6% in the three months to the end of June 2023, with growth across food, clothing and general merchandise helped by high levels of inflation.

Asda has also reduced the loss of shoppers to the discounters after updating its loyalty scheme and expanding to its own label range, led by its cut-price Essentials line, thereby reportedly driving 14.7% growth in own brand sales.

McKevitt said that as a result of such customer behavioural changes, the average increase in households’ weekly grocery shop was 5.13 pounds compared with 2022, well below the 11.27 pounds extra it would have been if they had continued buying exactly the same items as 12 months ago.

“Cool and wet weather meant shoppers switched away from traditional summer fare to more autumnal soups and roasting joints, sales of which rose 16% and 5%. The amount of ice cream sold slumped 30%, while soft drinks sales were nearly a fifth lower than 12 months ago when the UK was basking in hot, sunny weather. Halloumi, now popular at barbecues, was down by 27%,” the Guardian report stated.

The weather put a dampener on spending in supermarkets, with growth in groceries for eating at home slipping to 6.5% in the four weeks to 6 August from 10.4% a month before.

However, supermarket chain Morrisons has continued to struggle, with sales growth of just 2.3%, with only the online specialist Ocado and independent retailers faring worse.

Meanwhile, Bank of England Chief Economist Huw Pill has warned that prices in United Kingdom supermarkets may never fall back from their painfully high levels despite the plunge in international commodity markets.

The official also predicted that “substantial” falls on global food markets will eventually feed through to shoppers, though this may only slow the pace of increases in grocery bills rather than lead to an outright drop in the cost of products.

According to Pill, the increase in the cost of raw materials and basic food items should be traced to the Ukraine war fallouts.

“Some firms decided to sort of lock in their purchases of commodities in international markets in order to reduce that uncertainty, but potentially locked in at quite high levels of prices and they’re still passing that through the system into what ultimately we’re paying for in shops,” the BoE Chief Economist stated further, while predicting that price rises will begin to slow as those contracts come to an end and food sub-processors in the United Kingdom adjust to the end of supply disruption.

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One should expect the Bank of England to be stern with its monetary policy decisions.

Meanwhile, Britain’s property market is showing signs of a slowdown, after a jump in mortgage costs reduced both buyer demand and sales volumes.

The Royal Institution of Chartered Surveyors said its measure of sales agreed fell to -44% in July 2023, the weakest since the start of the COVID pandemic and down from -36% in June.

The European country’s housing sector has been at the eye of the storm called the ‘mortgage crisis’ since 2022 end. So what’s the ground situation right now?

Is the crisis over?

Bank of England Governor Andrew Bailey remarked, “The evidence on the housing market is, yes, there is an adjustment, of course – I don’t think we should be surprised at that. But I would certainly not wish to talk this up into a crisis in the housing market, because I think there’s plenty of evidence that suggests that this is a process that has some moderating influences in it as well.”

As per Halifax’s observations, the average house price has fallen by 0.3% in July 2023, amid the lending companies providing mortgage rate cuts. A typical British home is now costing £285,044, compared with the August 2022 peak of £293,992.

Experts believe that the Brits will be cautious in the coming days, knowing that despite the drop in energy bills and strong wage growth freeing up cash to cater to housing costs, the purchase price of an average home will still see around 28% of the buyers’ real income going towards mortgage repayments, much higher than the 20% in the 2010s.

Buyers prefer small homes

Kim Kinnaird, director at Halifax Mortgages, also said that first-time home buyers were searching for smaller properties, to offset higher borrowing costs. So these borrowers are facing an “affordability squeeze”.

Bank of England too has connected the downfall of UK house prices with the ‘consumer affordability’ factor. MT Finance observes, “Buyers are continuing to either play the waiting game or become more aggressive when offering on properties. But there are positive signs – there is still the desire to buy, but with a realignment with what is realistic or achievable in value.”

LSL Property Services said its full-year profits were likely to be “substantially lower” than previous forecasts because of changes in the home loans market driven by increases to interest rates.

Savills estimates further show that 25,000 homes were sold by landlords between April-May 2023, compared with 22,000 in the previous two months.

This selling-off has accelerated post-COVID, with the landlords feeling the pinch of rising costs and interest rates, which have made new buy-to-let mortgages more expensive to repay.

As per the UK Financial Conduct Authority (FCA), a huge number of homeowners having interest-only mortgages will be unable to pay back their loans when their deal ends. There are now 750,000 interest-only and 245,000 part interest-only mortgages in the UK, according to the FCA stats. In total, 12% of homeowners now have these deals. And decoding the tally further, it was found that nearly half of the one million people having interest-only mortgages will not have enough money to repay their lender.

Some 22% even told the FCA they did not know they had to repay their mortgage when their term ended.

Any more BOE rate hikes will directly result in the mortgage rates getting dearer and renters seeing their payments increasing as buy-to-let landlords pass on higher mortgage repayments to the former.

The Resolution Foundation warned in June about the rate hike cycles piling more misery on the troubled housing sector. The think-tank further predicted that going by the current market pricing, households remortgaging in 2024 will see an annual bill rise of approximately 3,000 pounds (USD 3,813) or more on average.

The crisis gets horrible further

Since April 2020, UK rents have increased by almost 10%. In the pursuit of cheaper accommodations, people are ending up at poor-quality houses, with data suggesting about 600,000 privately rented homes across the country posing serious hazards.

Sometimes, people are not finding affordable accommodations too, thereby contributing to rising homelessness. Till July, over 100,000 British families, including more than 125,000 children, were reportedly living in temporary accommodation, the highest figure in 20 years.

Understand the game here.

Rising house prices have been a driver of the United Kingdom’s economic growth since the 2008 financial crisis. While the total mortgage lending reached 316 billion pounds (USD 402 billion) in 2021, the highest since 2007, the Brits are known for spending a lion’s share of their income on their housing. However, since late 2022, as per Bloomberg, the average UK house has been costing around nine times than the Brits’ average earnings.

Mortgage rates were more affordable when the BOE’s benchmark lending rate was near zero. As of 2023, with every round of monetary policy tightening, the loan payment bills are eating into the families’ incomes.

The Institute for Fiscal Studies estimates that higher interest rates will cause the average mortgage holder to suffer an 8.3% fall in disposable income compared to a scenario where rates remained at March 2022 levels.

For 1.4 million of these mortgage borrowers, disposable income will fall by over 20%. So the whole thing will lead to an ‘affordability crisis’, which will dent consumer confidence in the property market, thereby leading to a sharp fall in property prices.

However, economists are not expecting the United Kingdom to face a negative equity crisis, a situation where house prices crash and millions of people find their properties worth less than their mortgages.

The concluding words

In an agreement reached between Britain’s biggest lenders and the Rishi Sunak government, struggling mortgage holders will get a 12-month grace period before their repossession proceedings begin, a news that an average Brit household may find a comforting one.

However, inflation is still well above 6%, a situation which may encourage the Bank of England further to tighten its monetary policy, thereby forcing the housing sector to go into a pronounced slowdown, with high mortgage rates driving potential homebuyers away, thus forcing the industry to slash sales targets and profit forecasts further.

The housing sector has been severely sandwiched with the ‘consumer affordability crisis’ and the resultant ‘market bloodbath’. That remains the harsh reality.

The post IF Insights: When will the United Kingdom’s ‘Housing Mess’ end? appeared first on International Finance.

As per the Office for National Statistics (ONS), United Kingdom’s inflation has fallen to 8.7% in April 2023, down from 10.1% in March. Since 2022 summer of 2022, it has been for the first time that the inflation ratio is going down below the double-digit mark. However, the latest ratio is well above the Bank of England’s 2% target.

Economists fear that another round of BoE monetary policy tightening will result in the rise of the borrowing costs of mortgages and loans, resulting in the country entering into a recession. A recent economic outlook from the ratings agency Moody’s has also predicted a similar trend.

Knowing The Exact Picture

The International Monetary Fund (IMF) has remarked that the United Kingdom economy is expected to avoid a recession in 2023, whereas the European country’s GDP will grow by 0.4% in 2023.

However, the IMF also cautioned about the “stubbornly” high inflation.

The IMF also noted that the biggest danger for the UK economy would be coming from a “greater-than-anticipated persistence in price-and-wage-setting”, which would keep inflation higher for longer.

It also predicted that inflation will not return to the Bank of England’s 2% target until mid-2025.

The Bank has put up interest rates 12 times in a row to bring down inflation and expects the trend to continue further.

As of now, UK GDP has registered a 0.1% growth in the first three months of 2023. However, ONS stats also suggest that the European country’s economy remained 0.5% smaller than its size in the fourth quarter of 2019.

BoE predicts Britain’s GDP growth pace at 0.25% for 2023, just enough to avoid a recession.

Country Facing Its Worst Wave Of Industrial Strikes

Britain has remained the only G7 economy yet to regain its pre-COVID GDP growth size.

Chancellor Jeremy Hunt has hiked the corporation tax from 19% to 25%, apart from introducing tax breaks that will allow companies to offset every pound invested in equipment, plant and machinery against taxable profits till 2026.

However, inflation is fast eroding pay scales and worsening the cost of living crisis further.

Over 133,000 civil servants are reportedly protesting for not receiving inflation-adjusted salaries. Transport workers, healthcare staff, and BBC journalists, all are on the protest path.

The country is facing its worst wave of strikes since the 1990s. While economists are batting for a boost in public sector spending, from June to December 2022 alone, the United Kingdom economy lost nearly 2.5 million working days to strikes.

A Neck-Breaking Price Rise

Data from the British Retail Consortium (BRC) suggests that the annual food inflation eased from 15.7% to 15.4% in May 2023.

The price of sausages, milk, cheese and eggs saw a growth slump from 17.8% to 17.2%, a minuscule 0.6% decrease.

The Bank of England has now raised its inflation estimate in response to predictions that food prices would remain elevated throughout 2023. The overall inflation is likely to be above 5%.

Non-food inflation had hit 5.8% in May 2023, 0.1% above the three-month average of 5.7%. So far, United Kingdom retailers have increased prices by 9%.

Consumers are now saving money by opting for high street seasonal promotions and the price reductions offered by supermarket loyalty schemes.

Ministers are reportedly working with supermarkets to voluntarily cap food item prices, a move reminiscent of the 1970s-style price controls.

Mortgage storm to rock housing market?

As per Nationwide data, house prices in the United Kingdom have gone down again, after a brief recovery in April 2023. The prices fell by 0.1% in May 2023 after a 0.4% increase in April.

On an annual basis, property prices fell by 3.4% in May 2023, compared with the 2.7% fall in the previous month.

As inflation remains high (or better to call it neck-breaking), bond yields have also risen since May 2023. Lenders have in turn increased the mortgage rates in anticipation of further BoE rate hikes. As per Nationwide’s chief economist Robert Gardner, the housing market’s situation will deteriorate further, with the inflation slowdown pace not meeting the analysts’ and investors’ expectations either.

On May 2023 alone, all the major British lenders had to raise mortgage rates. Smaller property players withdrew products in response to soaring interest rates.

Nationwide has already announced raising its mortgage rates on selected and tracker products by up to 0.45% point. As per Goodbody banking analyst John Cronin, the move will likely be emulated in the coming days by other lenders.

“One way or the other, loan customers are going to suffer higher pricing as far as I see which will adversely impact credit demand,” Cronin added, while interacting with the ‘Realty+’.

The last time mortgage rates in the United Kingdom saw massive spikes was in the period between October-November 2022, when the market reacted negatively to Liz Truss’ ‘mini Budget’.

Conclusion

Households have been under pressure from the fastest annual rise in food prices since the late 1970s. The Rishi Sunak government has set an ambitious goal of halving the inflation ratio by the 2023-end. The only way to ensure it is by tightening the BoE monetary policy further.

However, that is resulting in an upward mortgage rate. With the incomes falling, Brits are hesitant to go for property investments.

“While any fall in prices is good news for house hunters, it might not be enough to meaningfully offset the rising interest rate and its contribution to monthly mortgage payments. The stark reality is owning a home appears to be a distant dream for many, with high mortgage rate rates, high property prices and a higher cost of living, including climbing rents, making buying a home an increasingly difficult prospect,” commented Myron Jobson, senior personal finance analyst at interactive investor, while interacting with the Guardian.

While the Eurozone is now showing signs of inflation easing out, the situation in the UK has been a contrasting one so far.

The post IF Insights: Crisis-ridden United Kingdom is now staring at a recession appeared first on International Finance.

The Bank Rate has now been increased seven times in a row, but the increase was less than many investors had anticipated, The Guardian said.

The monetary policy committee of the Bank’s decision raises interest rates to their highest level since 2008.

The Bank of England worries that the United Kingdom is already in a recession, in part as a result of the bank holiday to commemorate Queen Elizabeth II’s funeral.

Bank employees revised their growth projections downward and now anticipate that the third quarter’s GDP will contract by 0.1%.

That would follow the 0.1% decline observed in April-June, making it the second consecutive quarterly contraction.

A month prior, the Bank had expected the GDP would expand by 0.4% from July-September.

However, July’s below-expected growth of just 0.2% and the recent bank holiday for the state burial have forced it to lower its projections.

Meanwhile, big tech is preparing for an uncertain future and an impending economic recession. The big tech companies, the majority of which report quarterly earnings next week, have recently given signs that they are hunkering down. It is already usual to hear of layoffs and a halt in hiring in Silicon Valley. Startups claim that capital is drying up. Workers are being put on notice that businesses are changing.

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What has happened?
The Bank of England increased interest rates on August 4 by 0.5 percentage points to 1.75% as the UK fights to keep inflation under control. It was the sixth consecutive increase in interest rates.

The army of British savers, who suffered losses as a result of years of interest rate reductions, should be relieved by this, in theory. Many people would have anticipated an increase in their savings account rates, but all too often the reality has been very different.

Something’s not good
Only two out of 233 easy access savings accounts have received the entire 0.5 percentage point rise as of August 15th, according to research.

According to a study by the website Investing Reviews, as of that time, the West Brom building society was the only provider to pass on the entire rise.

Providers like Zopa, Tesco Bank, Atom Bank, Tandem Bank, Skipton building society, and Gatehouse Bank, it added, had given their accounts some form of boost by passing on some of the rises.

According to the survey, only 26 quick access accounts (11.2%) had experienced any rate increases after the hike on August 4.

Do banks have to pass on interest rate rises?
Unfortunately, account providers are free to set their own savings rates. They may opt to forgo all, some, or even all of an increase in interest rates (or reduction).

One glimmer of good news is that banks will occasionally delay changing savings rates for a while—possibly several weeks or even longer. Consequently, just because your account’s rate has not increased as of today does not indicate you will not receive an increase.

To be honest, it’s still too early to notice savings improvements, an analyst said. Some companies might just now be making up ground from earlier base rate increases.

There is no assurance that savings providers will raise their rates in response to a Bank of England rate increase, and even if they do, it could take a few months for the rate increases to reach customers, according to Rachel Springall of the financial data company Moneyfacts earlier this year.

The Guardian reported that only four financial institutions had passed on the full increase to all, or almost all, of their variable-rate savings, account customers on January 23, more than five weeks after the Bank of England raised the base rate from 0.1% to 0.25%.

Do some people benefit from savings rate increases?
Overall, the average easy access rate has increased to 0.7% and is now at its highest level in nine years, according to data released by Moneyfacts. The typical value in August of last year was 0.18%.

Why are the providers increasing the savings rate?
The majority of the major banks, according to some analysts, have no interest in luring savers’ deposits.

Some will claim that banks are preying on disinterested clients. If they can, some customers will go in search of a better offer, but the majority of them won’t notice the difference or put off shifting their money.

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