Am I the only one that feels that (almost) everyone else is milking inflation for every penny or piastre that they can squeeze out of us? This may be grossly unfair, but sticking 20p on the price of garlic bread may be only 20p, but it is still 20% on a quid. By the time it has happened twice, by my mathematics that makes 40%. Perhaps it is just that a very large telecoms business, known by a two letter acronym, has just put up its monthly charges by 14%. 14%? (said in a slightly raised and offended tone).
The issue is inertia. Our propensity to be creatures of habit is not always to our advantage. But we can change if pushed too far. Lidl and Aldi thrive because they expose the extent to which the incumbent supermarkets rely on our inertia. It is no surprise that they are again gaining market share. Banks rely on what is colloquially known as CBA from their customers. Never mind that the rates of interest being paid are frankly pitiful (not to mention the estimated £268bn in accounts that earn precisely zero interest), they know they can get away with it because it is plain hard work to switch. Not only that, but hiding behind the cloak of our own ‘security’, for most banks it is nigh on impossible to switch more than three shillings a day to another institution that has the temerity to offer a better rate of interest. It is fantastic for profits, but a scandal for customers.
I am probably especially curmudgeonly on this cold and grey Monday morning. The so-called challenger banks have barely made the smallest of dents on the majors. It may be that as a nation we feel more comfortable with the perceived security of long-standing names. That would be despite the evidence of 2007 and 2008 that big banks are just as likely to go bust as anyone else. If not more likely. That last comment is unfair, as the balance sheets of the banks have been massively improved by the regulators over the past decade or so. The stench of burned fingers is impregnated into the walls of Threadneedle Street and over-leverage is not a mistake that will be repeated in this cycle.
That is enough of a banking tangent. My argument is that inflation is being distorted upwards by many businesses using 2022 and 2023 as a one-off window to whack up prices whilst the opportunity is here. Part of this may be a reaction to a long stretch when they were unable to do so, but is going to open windows to others who undercut them. Free-market capitalism is inherently and fundamentally deflationary: capital will flow to the most efficient producers. If you are not at the top of your game, you leave the door open to someone else to do it better.
This is inevitably going to happen. There is one caveat, which seems to be especially true of the UK. Labour. The number one challenge of broadly every business we talk to is getting the right staff at the right price. It is hard to see how this is going to change in the short or medium term. This risks venturing into territory which raises hackles, but the UK has made a number of choices that makes a shortage of labour a particularly hard nut to crack.
Financial markets had a better time of things last week. There was no great reason for this and it was probably simply due its turn after a slightly disappointing February. There are two potentially important points on this week’s calendar. First, Jerome Powell, the Chair of the Federal Reserve and a man with a mission to preach ‘higher-for-longer’ gives his half-yearly update on the state of life, the universe and everything to Congress. Whilst we know that the answer is actually 42, on Tuesday and Wednesday Powell will portray this as being, er, higher-for-longer. I would just quickly repeat my long-standing fear that having got inflation totally wrong during its rise in 2021 and early 2022, we should not pin too much faith on the Fed getting it right this time.
The second date for the week is Friday’s release of the monthly employment data in the United States, otherwise referred to as the non-farm payrolls. January’s figure of over 500,000 was deemed to be far too high and caused much of the fall in the equities over the course of February. This time, the market is hoping for a number slightly over 200,000. The deviation from this guess, where higher or lower (good game, good game), will shift the markets. Our regular readers will know that we are in a through-the-looking-glass world, where markets need to see some bad economic data before they believe that interest rates have peaked. As yet, American hiring is notably resilient.
Finally, well done to everyone who predicted a riot from Yorkshire tea last week. Today, some unashamed self-indulgence before I head to the Far East for a short break. The line is from the eight minute long titular track of a 1977 album: “Chinese music under banyan trees”. And there are double bonus points for anyone who knows the source of this week’s title, which is from another song by the same band.
Jim Wood-Smith – Market Commentator and Head of Climate Transition
FPC899
All charts and data sourced from FactSet
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