High street spend is depressed, but a short-term shift away may benefit town centres in the long run, says Jeremy Cooke
At the start of 2011, any economist worth his chips would have told you that the word that would govern this year's markets would be 'inflation'. Prices fell in the depths of the credit crunch, and in the subsequent recession, and the prospect of price rises drifted from the public mindset.
However, last year's forest fires in Russia combined with natural disasters in both Australia and New Zealand, not to mention the ongoing unrest in the Middle East, have hammered consumers' pockets and the problems are only likely to continue without a remedy in sight.
This throws the subject of interest rate rises into sharp focus. The headline increases in CPI have, of course, made the headlines. This is no surprise as, at the latest reading, inflation in the UK is still double the Bank of England's target of 2%. The problem is that a Bank of England rate rise would probably have little impact on prices, as most of this inflation is imported from abroad.
Sugar is 46% higher than it was a year ago, while wheat has risen in price by a whopping 98.5% and coffee by 133%. Granted, we grow a fair bit of wheat here in the UK but imports from Canada, France and Germany are still needed to meet demand and I haven't seen any coffee or sugar plantations in the UK of late.
This inflation is a global concern although I concede that we are feeling it more than most (inflation in the UK is 4% compared with 2.7% in Europe and the US) and the UK consumer has chosen to fight back by keeping hands in pockets. The latest BRC figures show that sales on the high street fell 3.5% in March and with the ONS GDP figures showing an increase of just 0.5% in the first three months of the year, it is very possible this trend will continue. So how can the issue be resolved?
Firstly, I think there is not too much to worry about in the short term as March retail sales are always poor in a year with a late Easter. Combine this with the recent double bank holiday and it is understandable that Mr and Mrs Bloggs have been saving their spending for a bit of fun over the long weekends. But spend they did. And in the world of currency, this desire to spend should prompt the markets to get behind the pound through the summer doldrums and push it forward away from recent sustained monthly lows particularly against the euro.
Andrew Sentance, one of the Bank of England's Monetary Policy Committee members, has blamed the weak pound for the 'inflationary issues', as the cost of the goods we import rises when the value of the pound falls. It naturally follows that pressure will ease on UK consumers should the pound begin to rally. That is as long as these price differences are passed on and not held for margin by the shops themselves.
And therein lies the rub: who can cope better with the higher prices: consumers, independents or large multinationals? Obviously the likes of Tesco and Asda can sustain price shocks longer than a local family-run store and trade will move to them as long as prices remain higher elsewhere. So the cure will sound strange to most, but hear me out; we need spending away from the town centres in the short term to stabilise the high street in the long term.
Some independents will fall but others will raise their games and as long as the consumer is spending somewhere, recovery will continue benefiting all parties in the long run.
Jeremy Cooke is chief economist at foreign exchange specialists World First.
At the start of 2011, any economist worth his chips would have told you that the word that would govern this year's markets would be 'inflation'. Prices fell in the depths of the credit crunch, and in the subsequent recession, and the prospect of price rises drifted from the public mindset.
However, last year's forest fires in Russia combined with natural disasters in both Australia and New Zealand, not to mention the ongoing unrest in the Middle East, have hammered consumers' pockets and the problems are only likely to continue without a remedy in sight.
This throws the subject of interest rate rises into sharp focus. The headline increases in CPI have, of course, made the headlines. This is no surprise as, at the latest reading, inflation in the UK is still double the Bank of England's target of 2%. The problem is that a Bank of England rate rise would probably have little impact on prices, as most of this inflation is imported from abroad.
Sugar is 46% higher than it was a year ago, while wheat has risen in price by a whopping 98.5% and coffee by 133%. Granted, we grow a fair bit of wheat here in the UK but imports from Canada, France and Germany are still needed to meet demand and I haven't seen any coffee or sugar plantations in the UK of late.
This inflation is a global concern although I concede that we are feeling it more than most (inflation in the UK is 4% compared with 2.7% in Europe and the US) and the UK consumer has chosen to fight back by keeping hands in pockets. The latest BRC figures show that sales on the high street fell 3.5% in March and with the ONS GDP figures showing an increase of just 0.5% in the first three months of the year, it is very possible this trend will continue. So how can the issue be resolved?
Firstly, I think there is not too much to worry about in the short term as March retail sales are always poor in a year with a late Easter. Combine this with the recent double bank holiday and it is understandable that Mr and Mrs Bloggs have been saving their spending for a bit of fun over the long weekends. But spend they did. And in the world of currency, this desire to spend should prompt the markets to get behind the pound through the summer doldrums and push it forward away from recent sustained monthly lows particularly against the euro.
Andrew Sentance, one of the Bank of England's Monetary Policy Committee members, has blamed the weak pound for the 'inflationary issues', as the cost of the goods we import rises when the value of the pound falls. It naturally follows that pressure will ease on UK consumers should the pound begin to rally. That is as long as these price differences are passed on and not held for margin by the shops themselves.
And therein lies the rub: who can cope better with the higher prices: consumers, independents or large multinationals? Obviously the likes of Tesco and Asda can sustain price shocks longer than a local family-run store and trade will move to them as long as prices remain higher elsewhere. So the cure will sound strange to most, but hear me out; we need spending away from the town centres in the short term to stabilise the high street in the long term.
Some independents will fall but others will raise their games and as long as the consumer is spending somewhere, recovery will continue benefiting all parties in the long run.
Jeremy Cooke is chief economist at foreign exchange specialists World First.
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