It’s official, UK inflation is falling and in October the rate fell to 4.5% having hit 5.2% in October.

We have seen that oil prices have been falling dramatically, with Nymex Crude sitting at just over $52 a barrel despite Opec reducing production to try to keep the price high. The fall in oil price has been filtering through to the economy lowering transport costs and with food prices falling too inflation has fallen.

There is however talk about the possibility of “deflation”, however, this is probably a bit premature with inflation still about 4%. The Bank of England has hinted at further interest rate cuts and there is a possibility that rates could fall to 2% by early next year.

The UK is not the only country with falling inflation and lower consumer confidence, the US has seen record falls in consumer prices when it dropped by 1% in October. This compares to a lower than expected fall in the UK where retail sales fell by just 0.1% in October, which is lower than the expected 1%. Retailers are having a hard time and are competing by discounting their prices!

The latest slow-down figures have again hit world stock markets with the Dow Jones falling by just over 5% and Japan’s Nikkei falling by just under 6.9%! The London FTSE is presently trading with a fall of just over 2%.

Better news for the property market

According to the Council of Mortgage Lenders (CML) mortgages in October picked up slightly, up by 7% over September.

“CML data shows that gross mortgage lending totalled an estimated £18.7 billion in October, almost 7% higher than what was an admittedly weak £17.5 billion lent in September. The monthly total was 44% lower than gross mortgage lending of £33.4 billion in October 2007″ Per the CML

The UK economy has “deteriorated dramatically” in the past three months, and is already in a recession, top forecasters have suggested.

The Ernst & Young Item Club says the UK will shrink by 1% next year, before recovering in 2010 and growing by 1%.

The Item Club’s chief economist, Peter Spencer, told the BBC: “Recession is already baked in the cake.”

But one “bright spot” is that inflation is likely to fall, enabling the UK to cut interest rates further.

The group said that company profits had already been damaged by very high commodity prices.

While recent actions taken by the government to shore up the banking system are welcome, the credit crunch will hit the economy “very hard”, Ernst & Young warned.

Mr Spencer said: “Even if equity markets stabilise and we begin to see capital flowing around the international financial system again, we are still looking at a domestic and global economy that will be in recession for the next 12 months.”

Rising unemployment

However, Ernst & Young forecasts that with plunging interest rates, falling inflation, and a fundamentally strong economy, the recession will be “relatively short and shallow”.

“We desperately need a global solution given the heavy dependence of our banks and borrowers on cross-border banking flows” Peter Spencer, chief economist, Ernst & Young Item Club

The group is not alone in thinking the UK has entered a recession – which is typically defined as two quarters of negative growth.

A recent quarterly survey of 5,000 businesses by the British Chambers of Commerce (BCC) also said the UK was in a recession.

Companies are likely to see their profitability squeezed further, prompting firms to invest 5% less in 2009, the Item Club predicts.

As a result of the slowdown, widespread cuts in investment and employment are “inevitable”.

While the largest job cuts so far have been in finance and housing – the sectors most closely linked to the recent turmoil – the effect will spread further.

It said it expected unemployment claims would hit 5% by the end of 2009, double the rate at the end of 2007.

Credit ‘expensive’

The report comes after recent data from the Office for National Statistics underlined the weakening labour market.

The number of people out of work in the UK rose sharply in the three months to August by 164,000 compared with the previous quarter, marking the biggest rise for 17 years.

Until September, accelerating inflation had been a major concern – latest figures show the annual CPI rate reached a 16-year high of 5.2% last month.

But prices have fallen recently, most notably for energy, and analysts expect September’s figure to mark a peak.

However, real disposable incomes are set to remain flat in 2009, before rising in 2010, the Item Club said.

The research group forecasts that consumption will fall by 1.2% next year, with credit continuing to be hard to obtain and unemployment expected to rise.

The Item Club predicts house prices will fall 14% by the end of this year, and drop a further 10% next year.

Until the bottom of the market is reached and confidence returns the housing sector will be in “deep freeze”, it says.

“Last year consumers were able to handle the income squeeze by borrowing and dipping into their savings,” said Mr Spencer.

But this year “it is a very different story with credit harder to access and far more expensive”.

Fiscal policy

The Item Club said recent government intervention had pulled the UK back “from the brink” but the banking system was “in intensive care”.

Earlier in October the UK government set out a number of initiatives to rescue the banking system by making £400bn available.

But the report said that addressing problems in the UK’s finance system could not be dealt with in isolation.

“We desperately need a global solution given the heavy dependence of our banks and borrowers on cross-border banking flows”.

Longer term it said the recent financial crisis had left huge question-marks over bank regulation and governance, as well as fiscal policy.

News reported by The BBC

The world stock markets have rallied at the beginning of the week from a low on Friday 10 October 2008. The FTSE 100 had a low of 3,932 rising to 4,394,but since then has fallen back by 122 points as investors fear that the action from the worlds governments to strengthen the financial system will not prevent a worldwide recession.

Asian governments are the latest to action bank support

Both Europe and US have announced a series of steps to secure their banks to bring back confidence to the banking section by recapitalise banks and by providing bank lending guarantees to get credit markets moving again and the Asian Governments have now followed suit. Worldwide governments have now pledged around $3 trillion as part of efforts to stem the financial crisis facing the world, which is seen as the worst since the 1930′s depression.

Despite the UK running head-long into a recession by December 2008 consumer price inflation has soared to 5.2% in September 2008, which is up from 4.7% in August as the annual rate of inflation for energy and other household bills reached 15%.

The UK’s Retail Prices Index has come in at 5%, which is the figure used to work out pensions and benefits for the coming year.

There are signs however, that inflation is slowing, as oil prices have dropped to around $78 a barrel and food prices are showing signs of reduction and other commodity prices are falling. For example, coffee prices are tumbling due to the credit crunch which is prompting some exporting countries to stockpile the beans in an attempt to push prices higher. Indonesia is the world’s largest coffee producer and on Tuesday they threatened to halt shipments until prices recover and that they were to seek government help to address the crisis.

UK retail sales unexpectedly jumped in August, figures from the Office for National Statistics (ONS) show.

High street sales rose 1.2% in August to stand 3.3% higher than a year ago. Analysts had expected a 0.5% drop after a swathe of gloomy surveys.

Clothing and shoes sales led the increase – buoyed by back-to-school shopping – but food sales fell 0.2%.

The report flies in the face of reports which predicted consumers would cut back amid the current economic gloom.

Recent surveys from the CBI and British Retail Consortium had painted a considerably darker picture of prospects for retailers.

Gloomy future

They blamed surging inflation, rising costs and bad weather for denting consumer spending, with the CBI branding it a “summer to forget” on the High Street.

But while the monthly and annual ONS figures were positive, sales in the three months to August fell 0.8% compared with the previous three months – the biggest drop since November 1990.

Analysts added that following a raft of bad news from the financial sector, sales were likely to slip back in coming months.

“With consumer confidence plunging in the wake of soaring inflation, falling asset values and rising unemployment the official retail sales will inevitably correct lower,” said ING economist James Knightley.

News reported by The BBC

The UK’s annual rate of inflation has risen to 4.7% in August, up from 4.4% in July.

Bank of England Governor Mervyn King will now have to write a letter to the chancellor explaining why inflation is higher than the government’s 2% target.

Higher energy and food bills sent the Consumer Price Index (CPI) higher, the Office for National Statistics said.

Inflation as measured by the Retail Prices Index (RPI) – often used in pay negotiations – fell to 4.8% from 5%.

The Bank of England’s Monetary Policy Committee has not been able to consider a cut in interest rates to boost the flagging UK economy while inflation keeps rising.

But with the sharp fall in oil prices over the past month from their high of close to $150 a barrel, some analysts are optimistic that inflation could be near its peak.

“This latest inflation figure, coupled with the recent moves in energy prices, could be an indication of inflation nearing its peak,” said Richard Hunter, an analyst at stockbrokers Hargreaves Lansdown.

He added: “This in turn could lead to a loosening of monetary policy by way of an interest rate cut in the UK, at a time when the markets are eagerly seeking signs of recovery.”

News reported by The BBC

Food prices in UK supermarkets and shops have risen by 8.3% since January, an index compiled for the BBC shows.

Meat and fish – up 22.9% – registered the biggest price increases for any one category in the survey, with fresh fruit and vegetables up 14.7%.

Retail analysts Verdict Research also found price rises of nearly 50% for some individual food items.

The figures come amid growing concern about the high cost of food, which is exceeding the official inflation rate.

The BBC Food Price Index compiled by Verdict is designed to track the cost of a typical trolley of UK food items.

PRICE RISES BY CATEGORY
Meat and fish: +22.9%
Store cupboard/general: +15%
Fresh fruit/vegetables: +14.7%
Laundry/washing/paper: +14.4%
Drink: +6.8%
Pet food: +6.5%
Bakery/cereal: +6%
Frozen food: +5.8%
Household: +4.4%
Health & beauty: +0.4%
Ready meals: -0.4%
Dairy: -1.8%
Baby food: -2.5%
Source: Verdict Research

It divides household supermarket purchases into 13 categories, including frozen foods, fresh fruit and vegetables, ready meals and dairy goods.

The index showed that during the eight months from January to August, meat and fish prices went up by 22.9%, making them the fastest-rising category.

General store-cupboard items, such as tinned foods, were the next most inflation-busting sector, registering a 15% increase, while fresh fruit and vegetables went up by 14.7%.

Seven items in the survey were found to have gone up in price by more than 40%.

A pack of four croissants was 47.4% more expensive and a 125g packet of ham went up by 45.4%, while the price of a medium-sized chicken increased by 41.9%.

PRICE RISES BY ITEM
Pack of four croissants: +47.4%
Original/Bolognese pasta: +46.2%
Ham (125g pack): +45.4%
Chicken breasts (skinless): +42.6%
Basmati rice (500g): +42.1%
Medium whole chicken: +41.9%
Mayonnaise (400g): +40.6%
Source: Verdict Research

Is the organic party over?

The figures produced for the BBC are in line with other recently-published research showing the impact of food price rises on UK household budgets.

On Wednesday, the British Retail Consortium (BRC) said that food price inflation over the past year amounted to 10% – more than twice the official Consumer Prices Index (CPI) inflation rate of 4.4%.

The BRC figures indicated that the rate of increase for fresh food items was even higher, at 11.9%.

CPI inflation is likely to rise to about 5% in coming months, analysts say.

Concern about inflation has led the Bank of England’s Monetary Policy Committee (MPC) to resist calls for cuts in interest rates, despite fears that the UK economy may be heading for recession if the cost of borrowing money does not come down.

On Thursday, the MPC voted to keep interest rates on hold at 5% for a fifth month.

News reported by The BBC

‘Rebajas’, ‘Gran Liquidacion’, ‘Descuentos’.

It’s hard to find a shop window in Madrid that isn’t littered with signs announcing big sales.

But despite the time of year, this is not a summer sale. This is a retail cool down.

There’s a cold front hitting Spanish shoppers.

With the housing market in a downturn, inflation continuing to rise and unemployment now at its highest rate since 1998, consumer confidence is taking a beating.

And while the Spaniards rein back on their spending, the retailers are battling to stay in business.

Luis Galeote owns a shop selling luggage and shoes in central Madrid. He has seen his sales fall by 25% in a year because people are cutting back on non-essentials.

“What happens is that people pull back on consumption of unimportant things, like in our case suitcases,” he explains.

“We stock shoes which are considered as a necessity but even they are affected.”

Retail sales across Spain have been falling rapidly since December.

First hit were shops selling consumer goods, such as flat-screen televisions and mobile phones. But since then the malaise has spread right across the retail sector to supermarkets and department stores.

Shutting up shop

Walking around Madrid it is not unusual to find streets dominated by boarded-up shops.

Shop owner Luis Galeote has seen sales fall

Wynn Williamson, a real estate analyst for Aguirre Newman, has seen many retailers close down in the neighbourhood where he lives in the city.

He thinks people are spending less because they’ve been hit hard by rising interest rates.

“Eighty percent of Spaniards are home owners and 97% of mortgages are variable rate mortgages. So where people were previously paying 500 euros (£402) a month, that rate could go up to 1000 euros.”

“Basically every person has less money to spend on luxury items, such as lunches and taxis, and that affects the economy all in all.”

Professor Pedro Schwartz of San Pablo University in Madrid thinks that things are going to get worse before they get better.

“What is worrying is that the problems are spreading quickly because of a lack of confidence”.

“We haven’t fallen into negative growth rates yet, but we will have a recession and it’s coming very quickly.”

With the Spanish economy stalling the government has tried to put its foot on the accelerator.

It has introduced a package of measures, including greater investment in public infrastructure and a 6bn-euro programme of tax breaks to try to get people spending again.

Will it be enough to turn the tide?

That will all depend on how much shoppers tighten their belts as the summer turns to winter.

News reported by The BBC

Two million people may be out of work by Christmas and house prices will fall by 30% if interest rates are not cut, a Bank of England policymaker has warned.

Professor David Blanchflower, a member of the Bank’s Monetary Policy Committee (MPC), told Reuters that big cuts in rates were needed to stave off a slump.

His unemployment forecast would mean 330,000 more people losing their jobs by the end of the year.

He urged the central bank not to be complacent and to act quickly.

Split committee

Professor Blanchflower has been a lone voice at recent MPC meetings in urging a rate cut, while the majority of MPC members have been more concerned about inflation rising above the Bank’s 2% target.

However, it is highly unusual for a member of the MPC to speak out in public about interest rate policy.

Professor Charles Goodhart was one of the original appointees when the MPC was established in 1997. He told the BBC that he was not surprised that Professor Blanchflower had spoken out.

“He has tended to do this before, he is very much an outsider and he has been in a minority of one literally every month since he has been on,” said Professor Goodhart.

The Bank is facing tough choices over interest rates

“I would expect that those involved in the financial world would not take what he says as any indication of what is likely to happen in future.”

At its latest meeting earlier this month, the Bank’s MPC voted to keep rates unchanged, but the vote was split three ways, with one member (Professor Blanchflower) urging a cut, while another (Tim Beesley) wanted a rate rise.

Professor Blanchflower – a US-based academic – says that the Bank of England should learn from the example of the US Federal Reserve, which has cut interest rates to 2% to stem off a looming recession.

And he urged the Bank to make a rate cut bigger than a quarter percentage point in order to avoid a slump.

Recession fears

Recently-revised government figures show that the UK economy ground to a halt in the second quarter of 2008, showing zero growth compared with the previous three months.

On Thursday, the Nationwide building society said that UK house prices were now falling at an annual rate of more than 10% a year.

Latest official figures showed unemployment rose in the three months to June by 60,000 to 1.67 million.

Many analysts expect the Bank of England to eventually begin cutting interest rates again, but they are not sure how soon.

“”There are clearly signs that they are moving in that direction fairly slowly,” said Jonathan Loynes of Capital Economics.

Markets are expecting a cut in interest rates by early next year. This expectation has also weakened the value of the pound because lower rates make it less attractive to hold sterling.

Misguided

Professor Blanchflower said that his colleagues on the MPC who were worried about entrenching inflationary expectations were “misguided” and “short-sighted,” as inflation was likely to “plummet” as the economic crisis worsened.

“What we have now is a turning point,” he said.

“We have a global financial crisis, an oil shock coming, and people really have very little experience of what is really going on.”

In its latest inflation report, Bank of England governor Mervyn King said that the UK economy faced “challenging times.”

The Bank’s central forecast, however, suggests that UK will just escape a recession, with growth of about 1% next year.

News reported by The BBC

The current global financial slowdown could “drag on for some considerable time”, the Bank of England’s new deputy governor has warned.

Charles Bean said the downturn was at least as bad as in the 1970s and that every time the markets began to look better, “another grenade” exploded.

But he said growth should pick up and inflation fall next year, if oil prices and credit markets stabilised.

Mr Bean described the crisis as a “transitory period” that would pass.

The deputy governor, who was speaking at the annual conference of the world’s top central bankers in Jackson Hole, Wyoming, said those at last year’s event believed the crisis would have been over by Christmas 2007.

“We’ve got our fingers crossed that things will improve. But there is the recognition that there is still a long way to go yet” Charles Bean Bank of England deputy governor

But instead, he said, it had carried on for a year and every time the markets looked like they were stabilising, “another grenade” exploded as bouts of fear over sustainability hit financial institutions.

“It looks like it will drag on for some considerable time further yet.”

He described the mood at the conference as one of “considerable caution for the next year”.

“We’ve got our fingers crossed that things will improve. But there is the recognition that there is still a long way to go yet,” he said.

‘Better regulation’

He went on to say the global financial climate was “as challenging a time as the 1970s”, but said it would be “foolish to believe” it could be prevented from happening again.

However, regulation could be improved to “reduce problems when they occur”, he said.

Mr Bean, who took over as deputy governor earlier this year, also called on people not to place too much significance on the latest UK growth figures, which showed the economy at a standstill.

Figures from the Office for National Statistics, released earlier this month, showed no growth from the first quarter of 2008.

The deputy governor said he was hopeful growth would begin to pick up again next year and that inflation would also “drop back”.

However, he acknowledged the squeeze on household incomes could create social issues.

The most important message, he said, was that the crisis would come to an end.

“This is just a transitory period of subdued growth and we will get through the other side and the growth will resume to more normal levels.”

Bank of England governor Mervyn King has already warned that the UK economy is in for a difficult and painful period due to a combination of high inflation and rapidly slowing growth.

News reported by The BBC

UK retailers defied predictions of another monthly sales slump in July despite pushing up prices, according to official figures.

The Office for National Statistics said retail sales were up 0.8% last month, reversing a sharp fall of 3.9% in June.

Analysts had been expecting a drop of 0.2% as cost-conscious consumers continue to struggle with high fuel and food bills and mortgage repayments.

The data was questioned as it clashed with evidence hinting at grimmer news.

Disputed

The British Retail Consortium (BRC), which produces its own survey of retail sales, disputed the idea that July’s sales were higher than June.

“The UK consumer is down but by no means out” Geoffrey Dicks, Royal Bank of Scotland

“Consumer confidence remains low, unemployment is rising and the housing market weakening,” said Stephen Robertson, BRC director general.

“It’s hard to see what could produce the sales growth boost ONS are reporting or their finding that smaller retailers are outperforming larger ones,” he added.

The ONS figures measure the volume of sales and some experts believe the value of transactions gives a more accurate picture of High Street conditions.

Some economists were also sceptical that the data, which has caused controversy since May figures showed a surge in sales of 3.6%, reflected the reality on the High Street.

“There has not been this level of volatility in the ONS monthly sales data in three decades,” said David Page, an economist at Investec.

Consumer resilience?

The ONS monthly figures for July cut the annual rate of growth to 2.1% – the lowest in two years.

But this was still only modestly lower from the 2.2% year-on-year rate recorded in June.

Retailers across the board reported a good month in a sign that the consumer slowdown may not be as sharp as feared.

Food sales rose 0.3% as shoppers hunted out bargains at discount stores, such as Aldi and Lidl, as well as budget lines within the bigger supermarkets.

Sales of household goods and clothing also held up well, although the ONS pointed out they were coming off a very low base with falls in June.

“Despite an intensifying squeeze on household budgets, the UK consumer is down but by no means out,” said Geoffrey Dicks, an economist at Royal Bank of Scotland.

Rising prices

The better-than-expected figures came even as retailers were forced to raise prices to prevent inflation from eroding their bottom line.

Prices on average rose to their highest level since 1998 – up 1.6% compared to a year ago.

This was largely driven by the soaring cost of food, which rose at the fastest pace since 1992 – up more than 6%.

With annual consumer price inflation – which rose to 4.4% in July – beginning to feed into retail prices, an imminent interest rate cut remains unlikely, some economists observed.

But many also concluded that July’s figures did not represent a pick-up in consumer confidence and sales were likely to weaken in the coming months as the economy slows further.

News reported by The BBC