British retail giant Next (NTX) is a barometer of the health of the high street so when it puts out an unscheduled trading update, markets pay attention.

It implied recent warm weather had encouraged to consumers to update wardrobes, a phenomenon that rival H&M (HM-B:STO) has also enjoyed as summer finally hit the continent in earnest at the start of June.

But what really captured the attention of analysts was the assertion from Next that those big pay rises from employers had led to a significant uplift of real household income which was mitigating the worst impact of inflationary pressures.

With Next perceived by investors as the expert in understatement, its shares shot to the top of the FTSE 100 risers immediately after its update, lifting a host of other retailers in its wake.

The key is consumer confidence and that is something that has been growing in recent months despite continued headlines about the cost-of-living crisis, stubbornly high inflation and a meltdown in mortgage markets.

Wages might not have kept up with inflation, but nominal pay has grown at the fastest rate in 20 years (if you strip out the pandemic) and the tight labour market has prevented businesses from shedding staff, even if their sums do not add up.

Inflation is coming down in various places, even in parts of the food sector which has been a main cause for concern amongst households in recent months.

With grocers still under pressure to do more after allegations of profiteering which they strenuously deny, a new bout of price wars has commenced which is likely to put more money back in shoppers’ pockets. Tesco (TSCO), Sainsbury’s (SBRY) and Marks & Spencer (MKS) have all slashed the cost of everyday essentials.

The cure for bringing down inflation has created another economic ailment. The cost of government borrowing over two years has topped 5% for the first time since 2008 as markets price in further moves by the Bank of England.

It has piled even more pressure on lenders which have responded by pulling products or raising the rates on the average two-year fixed mortgage above 6%. For homeowners facing remortgaging the reality is pretty stark.

The Resolution Foundation has warned that just under half of the 7.5 million mortgage holders in the UK have not yet faced an increase in their payments, but 3.3 million households face that cliff-edge between now and 2026 – with the expectation that rates will not fall below 4.5% until the end of 2027.

It estimates the average jump in annual repayments will come in at £2,900, an amount that cannot help but impact the amount disposable income those consumers have to spend in shops like Next.

For its part, Next has always tried to under-promise and over-deliver, which is why its latest guidance was only moderately lifted as the company anticipates that the benefits of pay rises will be eroded by cost pressures.

SHIFTING DYNAMICS

Retail will not be the only sector warily watching mortgage movements. Middle earners with savings cushions were insulated from the worst of the energy crisis. But those saving cushions have been reduced and there are accounts of living standards having to be pared to the bone as those ultra-low rates of the past are resigned to the history books.

Will these consumers still be able to take that long weekend at places like Centre Parcs? The holiday park operator has done such a roaring trade post-pandemic that its business sale has attracted a wide range of interest from investors rumoured to include Pinewood Studios-owner Aermont.

And what of the housing market? So far, house prices have shown little sign of distress with Rightmove reporting that the average asking price dropped in June for the first time this year, but only by £82.

But it is predicting a fall in asking prices by 2% by the end of year and housebuilders are already redrawing plans.

Yes, the consumer has been resilient but the very thing that has shored up that resilience, those elevated wage increases, have sparked concern about a wage price spiral which UK central bankers are desperate to prevent.

Earlier comments by MPC members might have been clumsy at best but the underlying sentiment was sound and as a new cost-of living crisis emerges from the old there will be more calls for government intervention.

With an election in the offing quick fixes might be vote winners but inflation is a funny beast and one that economies around the world are still struggling to tame.

‹ Previous2023-06-22Next ›