Household finances experience inflation worry

The Markit Household Finance Index has seen households signal the strongest inflation expectations since late-2014.

Year ahead financial expectations most downbeat for three years and household income remains close to stagnation.

The majority of UK households anticipate a base rate rise in next 12 months.

Markit’s index, which is intended to anticipate changing consumer behaviour accurately, uses data collected by Ipsos MORI.

The degree of financial strain on UK households was unchanged in November, as shown by the seasonally adjusted Household Finance Index (HFI) holding steady at October’s reading of 43.7. Though subdued relative to the post-crisis trend (40.1), the latest figure signalled a stronger downturn than on average in 2016 (44.2). Inflationary perceptions regarding both current and future living costs were at least partly behind financial pressures. Households’ current price perceptions surged to a near two-and-a-half year high.

The seasonally adjusted index measuring expectations for finances in 12 months’ time dropped for a third straight month to a three-year low of 45.3 in November. Down from 47.9 in October, the index pointed to a negative financial outlook for the eighth month in succession. Pessimism was reported in both the private and public sectors, with private sector sentiment slipping to the worst since November 2013.

By sector, the sharpest rise came in retail, followed by manufacturing. Worries about job security persisted in November, although the respective index edged up since October and above the series average. Income from employment meanwhile remained close to stagnation. Notably, private sector workers saw downward pressure on incomes for the first time in 17 months.

Markit economist Philip Leake said: "UK households signalled the worst financial outlook for three years in November, with inflation expectations picking up to the highest since late- 2014. Whereas official prices data released yesterday morning pointed to consumer price inflation easing slightly, it also highlighted a record rise in producers’ costs thanks largely to the weaker pound, thereby vindicating households’ worries of mounting price pressures. "Meanwhile, fewer households see the Bank of England cutting interest rates again to boost the UK’s growth prospects. In fact, the overall consensus is for a rise in the base rate aimed at curbing inflation – over half of respondents (55 per cent) predict an increase within the next year for the first time post-Brexit."

Uk inflation unexpectedly dipped in October, by 0.1 per cent to 0.9 per cent, according to the Office for National Statistics. The drop was driven by cheaper clothes due to unseasonably warm weather and supermarket price wars despite a rise in import costs. But economists predict the cost of raw materials and household incomes would rise in the future.

Garden Centre Association chief executive Iain Wylie said garden retailers were yet to implement price increases caused by exchange rates and Brexit but wholesaler price rises from autumn 2016 would kick in from the start of 2017. He said there was still uncertainty around exchange rates, particularly post-Donald Trump's election as USA president last week and subsequent falls in the value of the dollar. He added: "There will be changes afoot and rises to deal with but I don't think garden centres have to deal with them yet."

He said Christmas sales had started early and "money was in the bank" with the trade was 4-5 per cent up year to date overall after the trade recovered from a slow start to have steady gains later in the season across the board.

But he added: "The challenge is the uncertainty. There doesn't seem to be a clear direction with currency post Brexit and Trump."

Wylie suggested that garden centre buyers would have a "more challenging job" in 2017 because they may have to look "further afield" for product "if certain products don't meet the right price to sell at the volume and margin they require".

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Neville Stein

Business advice from Neville Stein, MD of business consultancy Ovation

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