View more on these topics

Cazenove predicts inflation to moderate next year

Inflation could moderate further than expected next year, allowing the Monetary Policy Committee to remain in accommodative mode for the forseeable future, according to Cazenove.

Richard Jeffrey, the head of strategy and economics at Cazenove Capital Management, says several pressure points have caused inflation to be higher than the MPC expected.



Transport costs have risen sharply for example, mainly as a consequence of spiralling fuel prices.

More broadly, while GDP and household final consumption both fell in the 18 months to the third quarter of 2009, retail sales (excluding petrol) actually posted a rise in volumes of 2.3 per cent over the period.

“During 2009 as a whole, household spending fell 3.4 per cent, while retail sales (ex-fuel) rose 1.7 per cent,” adds Jeffrey.

 “What seems to have happened within consumption trends is that households were very focused on the way they economised. Spending on air travel fell very sharply but helped by the cashflow boost from falling mortgage interest rates, day-to-day high-street spending continued to grow.”


Despite the deepest recession in living memory, he says households were able to continue to grow their retail spending levels, in direct contrast with the situation during the early 1990s.

“The consequence has been that the high street has not been as competitive as it might have been and retailers have had more pricing power than anticipated given the wider economic backdrop. Hence, inflation has remained higher.”

Looking forward, the strategist says households are currently being squeezed by CPI inflation running considerably higher than growth in incomes.

This is likely to impinge on high-street spending towards the year end, leading to the possibility total household spending will actually decline in real terms.

“If this view proves correct, then inflation trends are likely to become more benign as we move through 2011,” adds Jeffrey.

“Generally speaking, trends in demand tend to feed through to inflation with a lag of three to four calendar quarters. So, weaker growth (or possible falls) in household spending will most likely be reflected in more competitive high-street pricing in the second half of 2011. This suggests the MPC will feel it appropriate to remain in its over-easy mode for a considerable period to come.”

Recommended

1

Aifa says ruling on Keydata does not set precedent for IFAs

Aifa says the Financial Ombudsman Service ruling against Norwich & Peterborough Building Society over its advice on Keydata should not alarm IFAs who sold the products. In a provisional judgment, the FOS ruled that Norwich & Peterborough should pay a couple’s £28,000 investment plus interest relating to a Keydata product invested in Lifemark. The judgment, […]

5

Scales of justice

The concept of “justice” is marvellously flexible. It is a word that acquires new meaning entirely dependent on whose mouth is articulating it. The definition ascribed to it by the Oxford Dictionary states: “The quality of being fair and reasonable.” When Walter Merricks, ruled as chief ombudsman , he advised the Treasury select committee, “we […]

Colin Bell
2

The meaning of guarantees

The ’cost’ of guarantees is used as a stick to beat the industry but with reduced risk there must be reduced returns

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment