You may have seen this morning that the UK’s monthly inflation figures more than doubled from 0.7% to 1.5% in April. For a while I have been warning about the threat of rising inflation and that before long Government figures would start to reflect the rise in prices we have all been seeing for months.
This is the start of a very sharp rise and inflation is something we’re all going to have to keep a very close eye on.
Rapidly rising inflation
There are two reasons to keep an eye on inflation right now. The first is how it compares to wage growth. At the moment, the latest ONS figures show that real-term wage growth per month is 3.4%. With inflation at 1.5%, that means the public still has 1.9% of additional spare cash in their pockets. However, inflation looks set to rise very sharply in the coming months and looks set to soar past the BoE’s revised target of 2.4%. The moment inflation measures more than wage growth, that means the cost of living is eating into the disposable income of the public.
The Bank of England anticipated hitting 2.4% inflation by the end of the year. But I think everyone in fenestration, indeed anyone in construction or involved with the purchasing and using of any raw materials knows that inflation is going to rise way more than that and far quicker. Price were already rising at the end of last year, and have only accelerated this year as shortages and high demand have squeezed everything. We’ll be hitting that 2.4% target before too long. The question then becomes how high and how fast inflation rises, and how much it eats into the spending power from the general public.
At the moment, if inflation rose to 4-5% this year, it may not cause too many problems immediately as many households are still sat on thousands of pounds of spare cash ready to spend. That wouldn’t really dent spending power in the short term. If however we get to the end of the year and we’re looking at high single-digits and it looks like higher inflation is more permanent rather than transitory, then it is going to start to impact public spending.
This is a story rooted very much in the business world, but it has real effects on everything around us, including the ability for the public to spend on big-ticket items like new windows and doors. Should inflation rise too much and too quickly it could quite easily halt the huge spending spree we have all been benefitting from over the past year.
But this is only one reason to keep an eye on rising inflation. The other is down to how to bring it under control.
Possible interest rate hikes
The go-to method to bring inflation under control is to raise interest rates. The most famous instances of this in recent decades was at the start of the Thatcher era. Before she entered office inflation was at a frightening 25%. Even in 1980, it was still over 20%. In response, interest rates rose to a high of 17%. This harmed manufacturing and exports but did eventually bring it under control, with inflation falling to just under 5% in 1983.
It caused turmoil in the economy and millions were unemployed. Whilst there is no suggestion yet that inflation could rise to 25% again, there is a significant risk that we could see high double-digits by the end of the year unless the prices of raw materials and commodities fall swiftly lower. A lot of the increases take time to filter down to the public level, so the prices we have seen rise months ago will only be felt now. Experts are warning that there are no indicators to suggest that raw material prices are going to stop rising imminently.
If inflation rises tangibly beyond the BoE’s revised target ahead of schedule, there is going to be significant speculation about rate increases. Remember that the Bank of England did not foresee having to raise rates for at least a couple of years. Those plans might now be looking shaky.
This would affect the spending power for a portion of the public. For those on a tracker mortgage, monthly payments will go up. Yes, the base rate is at historic lows, but any increase on a large mortgage is going to have a material impact. Those with debt will suddenly find servicing that debt more expensive, with minimum monthly payments on credit cards going up and the APR on loans that are not fixed going up as well. All of that takes money out of people’s pockets. if you’re a saver you won’t mind getting a bit more return on your money.
Right now, rising inflation is very much a news story for the business world, but one more major jump higher next month and you’ll see it make bigger waves. For fenestration, this is one area of the economy that we need to keep an eye on.
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