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Prices rise: What people are cutting back?
PRICES RISE UK INFLATION
Prices rise: What people are cutting back on?
IF CORRESPONDENT
As there is a steady rise in the prices of various commodities, households across the UK are worried about how to deal with the rapid surge, claims a BBC survey. From food to fuel, there has been an increase in rates of every essential product, something that has not been this high in the last
More than 30 years. As a result of which people are responding to the half the price rise by cutting back. people who BBC spoke to many people across took part in the UK to determine how they are the survey adapting to this situation. Most of claimed that the respondents claimed to have cut they had down on food, clothing and travel.
skipped meals
on multiple Food occasions in The most essential aspect of human the past six life - food, is one of the top picks for months to many. In the UK, many have cut save money down on food as they feel that it has been a major reason for burning a hole in their pockets. Paul and Amanda shared their concerns about having to spend on food and how restricting the purchase of food has become the need of the hour. They claim that despite the fact that once in a while they do opt for takeaways and go out for meals, it's not a regular affair like how it was in the past.
"We're just more mindful now, of expenditure," Amanda said.
They have also restricted themselves from purchasing branded products and are looking out for good deals and own-brand items.
Paul said, "We can't just go in there and buy what we like now, we have to think, Well, hold on a minute." "We have to look at: What do we really want? What do we really need? Do we really need that luxury? Do we really need those sweets?"
Paul, who has been shopping around and buying products in bulk, claims that he has a reason for doing so. "Just to make sure that if we buy this now, that will last a month or two," Paul said.
And it has not only been just Paul and Amanda, but about two-thirds of people have been consuming less food than before, while many have cut down on their takeaway meals.
More than half the people who took part in the survey claimed that they had skipped meals on multiple occasions in the past six months to save money.
Meanwhile, grocery analysts have predicted that food prices will rise this summer due to soaring costs.
Institute of Grocery Distribution (IGD) said that the prices are expected to increase by 15% as households usually spend money on staple food
like bread, meat, dairy, fruits and vegetables.
IGD also warned that the more vulnerable people will skip meals.
Prices would rise faster for longer than the Bank of England estimates, it predicted.
The IGD, which provides analysis to major grocers, said due to the Ukraine war the United Kingdom was facing the highest cost of living pressures since the 1970s.
Both Ukraine and Russia contribute to nearly a third of global wheat exports. Russia's invasion of Ukraine has resulted in increasing grain prices.
The cost of products such as bread, which is derived from grains, and chicken, which is fed on grains is expected to increase, according to IGD.
As chickens hardly take a few weeks for their growth, the price rise will be felt by the consumers sooner.
The driving fuel costs also will push the food prices higher. In addition, the price of fertilizers has nearly tripled since last year.
As a result of the invasion, the roads, ports, and warehouses in Ukraine have been heavily damaged in the war. Due to this, the volume of exports will be reduced for years to come, IGD said, piling up pressure on supplies of wheat and sunflower oil.
At least two-thirds of the people on the Seasonal Agricultural Workers scheme last year were from Ukraine, but this year, Ukrainian men have been told to stay and fight against Russia.
The new workers need training and as a result of which those costs will feed into price rises, IGD said.
Since the UK gets around 40% of its food from other countries, it is well exposed to global food price rises.
Adding more worries, since Brexit, European Union producers are less likely to prioritize their customers in UK.
IGD stated that higher inflation could last longer than expected if there are more bans on food export or trade disruption because of Brexit border arrangements in 2023.
Clothes After food, the next thing most people spend their money is on clothing.
Thanks to the recent price rise in her food, electricity, and gas bills, Rebecca says that her family's shopping habits need to take a cut. "We know the further rise in gas and electricity is coming in October, so we're just trying to get into good habits now," said Rebecca.
Despite Rebecca never being a "big spender" on her fashion needs, her daughter Jess is exactly the opposite.
PRICES RISE UK INFLATION
"We have to rein back the amount of money that we're spending on clothes. We have to make sure we're making the most of what we've got, as opposed to going out and buying new," she said.
Much to Rebecca's relief, her daughter's school will be providing free school uniforms.
BBC cost of the living survey suggests that in the last six months, three-quarters of people have cut down on their clothing shopping expenses and nearly half of them have shelled out less money for their children's clothing.
Travel Georgia feels that she can save money by spending a day out at Birmingham's Cannon Hill Park rather than shelling out extra bucks by taking her daughter HarperFaye to a visitor attraction. "I haven't got the money to go to Sea Life Centres and stuff. That's like, GBP 25 a ticket," Georgia said.
As far as travel goes, she claimed that she is not taking her car out as much as did in the past. "The diesel is absolutely crippling me. I can't go out as much as I used to, not a chance. I can't afford it. I need to make sure I can get to work and back, and that's my priority at the moment," she added.
Echoing similar views, Lisa, a disabled power chair user who lives near Ashford in Kent, also claimed that she's cutting back on her car use due to the rise in fuel rates.
Lisa said, "I am having to choose whether I can afford to go out. I have a wheelchair-accessible vehicle, but obviously, fuel is really expensive, so I'm having to make choices restricted their travel and trips.
With all the three aspects coming into play one could say that it's going to be a rough ride ahead for everyone.
UK interest rates increased to 2% by the Bank of England. Due to the pace of soaring prices, the Bank of England has further increased the interest rates. The interest rates, which are the fifth consecutive rise, have increased from 1% to 2%, which has pushed them to the highest level in 13 years.
This has come at a time when the cost of living is increasing with every passing day. Inflation is currently at a 40-year high of 9%, with the Bank warning that it could surpass 11% later this year.
Inflation rates for United Kingdom
2021 2.6% 2020 0.9% 2019 1.8% 2018 2.5% 2017 2.7% 2016 0.7% 2015 0.1%
Source: Rateinflation.com
on how often I can afford to go shopping - just to get to the shops, let alone affording the price rises once you get there as well."
The BBC survey revealed that nearly two-thirds of people have Where inflation is the highest and lowest? The average annual inflation rate in the first quarter of this year was at
least twice what it was in the first quarter of 2020, as COVID-19 was beginning its deadly spread. In 16 countries, first-quarter inflation was more than four times the level of two years prior. (For this analysis, Pwe Research used data from the Organization for Economic Cooperation and Development, a group of mostly highly developed, democratic countries. The data covers 37 of the 38 OECD member nations, plus seven other economically significant countries.)
Among the countries studied, Turkey had by far the highest inflation rate in the first quarter of 2022: an eye-opening 55%. Turkey has experienced high inflation for years, but it shot up in late 2021 as the government pursued unorthodox economic policies, such as cutting interest rates rather than raising them.
The country where inflation has grown fastest over the past two years is Israel. The annual inflation rate in Israel had been below 2% (and not infrequently negative) every quarter from the start of 2012 through mid-2021; in the first quarter of 2020, the rate was 0.13%. But after a relatively mild recession, Israel’s consumer price index began rising quickly: It averaged 3% in the first quarter of this year, more than 25 times the inflation rate in the same period in 2020.
Besides Israel, other countries with very large increases in inflation between 2020 and 2022 include Italy, which saw a nearly twentyfold increase in the first quarter of 2022 compared with two years earlier (from 0.29% to 5.67%); Switzerland, which went from -0.13% in the first quarter of 2020 to 2.06% in the same period of this year; and Greece, a country that knows something about economic turbulence. Following the Greek economy’s near-meltdown in the mid-2010s, the country experienced several years of low inflation – including more than one bout of deflation, the last starting during the first spring and summer of the pandemic. Since then, however, prices have rocketed upward: The annual inflation rate in Greece reached 8% in this year’s first quarter – nearly 21 times what it was two years earlier (0.36%).
Annual US inflation in the first quarter of this year averaged just below 8% – the 13th-highest rate among the 44 countries examined. The first-quarter inflation rate in the US was almost four times its level in 2020’s first quarter.
Regardless of the absolute level of inflation in each country, most show variations on the same basic pattern: relatively low levels before the COVID-19 pandemic struck in the first quarter of 2020; flat or falling rates for the rest of that year and into 2021, as many governments sharply curtailed most economic activity; and rising rates starting in mid- to late 2021, as the world struggled to get back to something approaching normal.
But there are exceptions to that general dip-and-surge pattern. In Russia, for instance, inflation rates rose steadily throughout the pandemic period before surging in the wake of its invasion of Ukraine. In Indonesia, inflation fell early in the pandemic and has remained at low levels. Japan has continued its years-long struggle with inflation rates that are too low. And in Saudi Arabia, the pattern was reversed: The inflation rate surged during the pandemic but then fell sharply in late 2021; it’s risen a bit since, but still is just 2%.
Inflation doesn’t appear to be done with the developed world just yet. An interim report from the OECD found that April’s inflation rate ran ahead of March’s figure in 32 of the group’s 38 member countries.
editor@ifinancemag.com
ECONOMY FEATURE INFLATION UNITED STATES ECONOMY
Interest rate cuts show central banks willing to plunge economies into recession to halt price rises
How global inflation will affect people
IF CORRESPONDENT
The Federal Reserve of the United States has announced its largest rate hike in nearly three decades as it intensifies its fight to bring skyrocketing consumer prices under control. It increased the Federal Reserve's borrowing rate by three-quarters of a percentage point. The ramifications will be felt in practically every sector of the economy, both domestically and internationally. Here's how global inflation will affect you.
More expensive mortgages and other loans
The immediate impact will be felt in the United States, where people will have to pay more for mortgages, credit cards, school loans, and other debt. The 30-year fixed-rate mortgage's average rate has already risen to about 6%, the highest level since 2008. Monthly payments for someone buying a median-priced home in the United States have increased by around $600 since the beginning of the year.
Delores Robinson, a retired educator from Ohio who recently purchased a new apartment, says, "I wish I had started looking earlier."
Ms Robinson says she was relieved to lock in a cheap rate, despite the fact that it was more than when she began her search. However, rising rates will put purchases out of reach for some buyers.
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C-COMMERCE
ECONOMY FEATURE INFLATION UNITED STATES ECONOMY
According to the National Association of Realtors, home sales in the United States are expected to drop 9% in 2022. This decrease may be distressing for those who have been unable to purchase, but it is also predicted to slow price growth to 5% in 2022, after double-digit increases in recent years. If this occurs, it will aid in the reduction of inflation, indicating that the Fed's actions are having an effect.
Smaller pensions & more expensive Uber rides
When interest rates rise, investors tend to reshuffle their portfolios dramatically. Those movements have been increasingly prominent as general economic concerns have grown. Those with money invested in the stock market, such as those with 401k retirement plans (a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts), have seen their investments plummet in value. The S&P 500 has lost more than 20% of its value since January 1, signalling a bear market, while the Nasdaq has lost over a third of its value.
Risky assets, like cryptocurrencies, have seen their prices fall, as the stock exchanges outside of the United States have also been hit. Investment firms are increasingly backing away from more risky enterprises, seeking profitability from companies like Uber, which has been losing money for years. That implies individuals will have to pay more for things like cab trips and delivery, or such businesses would close down, as happened with a number of start-ups in New York that promised 15-minute groceries. "In times of uncertainty, investors look for safety," Uber boss Dara Khosrowshahi wrote in a letter to staff last month about the steps the firm would take to try to boost its bottom line, including slowing hiring. "It's clear that the market is experiencing a seismic shift and we need to react accordingly", he said.
Job market slowdown and recession risk
As demand declines, the robust post-pandemic labour market, which saw employers compete aggressively for workers, allowing new recruits to demand higher pay and other perks and encouraging many to move professions for better, is coming to an end.
Property giants Redfin and Compass announced plans to lay off hundreds of employees, citing the downturn and rising rates as reasons. A spate of major corporations, including Amazon, Walmart, Tesla, and Spotify, has announced plans to reduce or eliminate employment.
Jerome Powell, the chairman of the US central bank, expressed optimism that the economy will escape widespread job losses, despite the fact that the US labour market remains tight, with nearly double the number of openings for job seekers. However, the economy was already suffering difficulties, as inflation raises business costs and reduces people's purchasing power.
In the first three months of the year, growth had already slowed. While this was initially attributed to a data anomaly in foreign trade, other indicators, such as retail sales, have begun to deteriorate. Analysts warn the bank risks causing a persistent downturn, as rising rates clash with a weaker economy, also known as a recession.
Stronger dollar
The US dollar has gained 10% this year as a result of the Fed's actions, which have prompted investors to migrate money to America in search of higher yields, boosting demand for the currency. It's a silver lining for Americans considering holidays to destinations like the United Kingdom, where the pound fell below $1.20, its lowest level since the pandemic.
However, the rising value of the US dollar means that imports of goods such as energy and food, which are frequently traded in dollars, will be more expensive. This adds to economic difficulties, particularly if a government has a large dollar-denominated debt.
Fiona Cincotta, a market analyst at City Index says, "Emerging markets tend to be the markets that really do stand to suffer the most."
Higher rates abroad
The US is not alone hiking in a vacuum. Dozens of other countries have also announced rate rises in recent months, including the Bank of England, and Switzerland. Australia and Canada.
Inflation is a war that many people are battling. They are, nonetheless, in-
fluenced by events in the world's greatest economy. In nations where currencies are pegged to the dollar, such as Kuwait and Saudi Arabia, the impact of US rate hikes is nearly immediate, with banks increasing in lockstep to stem a money drain to the US. The economic story in the United States will continue to be keenly monitored as those changes take effect.
US economy can deal with inflation
Meanwhile, President Joe Biden says he's confident a US recession isn't inevitable, but inflation is soaring. Speaking to the Associated Press, Biden said the US economy wouldn't necessarily fall into recession, even as growth slows and inflation stays strong. "First of all, it's not inevitable. Secondly, we're in a stronger position than any nation in the world to overcome this inflation", he said.
Inflation has been rampant in the United States, with an annual rate of 8.6% in May, the highest in 41 years. As Western sanctions on Russian energy exacerbate the general gap between global demand and supply, fuel costs are at the heart of the surge in consumer prices. However, the cost of basic commodities and shelter is also rising rapidly.
The Federal Reserve took a bold step, boosting the benchmark interest rate by 75 basis points to combat inflation. This was the greatest rate hike since 1994, and more is on the way, with Fed policymakers predicting that rates will need to rise to around 4% in 2023, the highest level since early 2008.
Despite the Fed's efforts and Biden's optimism, a number of prominent economists and investors have warned of an imminent recession in the United States. Economists at Wells Fargo said the steep rate hikes will raise borrowing costs across the economy and are likely to tip the US into a "mild-recession," in mid-2023.
Morgan Stanley's chief strategist Mike Wilson, who correctly anticipated the last three stock market crashes, stated that the likelihood of a recession has increased as a result of the introduction of higher rates.
Wilson, though, believes that even if the Fed achieves a soft landing, the stock market will remain chaotic. He expects the S&P 500 to drop another 10% from its current level to as low as 3,400 points, with the Nasdaq 100 following suit.
The stock market where millions of ordinary people invest is on track for its worst week of losses since March 2020 as inflation and recession fears mount. Earlier this week, it officially tipped into a bear market, having lost more than 20% in value from a record high in January.
Richard Hunter, head of markets at trading platform Interactive Investor said for the moment, the mood is clear. Investors globally are questioning whether any global growth is possible amid the current monetary shackles and are giving risk assets a wide berth at the slightest excuse.
According to the American Automobile Association, consumer opinion toward the US economy is gloomy, as high petrol, food, and home prices affect Americans' wallets. As a result of Russia's sanctions, gas prices have surged to new highs, with the average national gas price now above $5 per gallon.
Consumer confidence has plummeted to new lows. In June, the University of Michigan consumer confidence index fell to a new low of 50.2, as a failing economy, rising costs, and personal financial concerns hit home. For millions of Americans, the economic slowdown is a major concern. According to Google Trends, more people in the United States have searched for the term "recession" this year than at any point before 2004.
FEATURE
US INFLATION
editor@ifinancemag.com
104 | July - August 2022 | International Finance
ECONOMY
FEATURE
BREXIT UK RECESSION
According to a financial analyst inflation rate of 9%, which is at a 40-year high, is putting pressure on Britain
UK's economic storm: Reason – Cakesim?
PRAJWAL WELE
The resignation of British Prime Minister Boris Johnson increases the level of uncertainty facing the country's economy, which is already under pressure from double-digit inflation, possibility of a recession, and Brexit.
It might take a long time to find Johnson's replacement, till then the fifth-largest economy in the world would be at risk of further drift at a time when the pound is close to twoyear lows versus the dollar, and the Bank of England (BoE) is struggling to raise interest rates without hurting the economy.
There are many key questions hanging over like whether Britain's economic policy and Brexit were responsible for Johnson's resignation and what will happen to Britain's economy?
Graham K. Wilson, Professor Emeritus University of Wisconsin- Madison, Professor Emeritus Boston University, Political Science, USA told International Finance that during the 2016 campaign that led to Brexit, Boris Johnson proclaimed his devotion to “Cakeism” (the wish to have or do two good things at the same time when this is impossible), he denied the old adage that you cannot have (keep) your cake and eat it and argued that it was possible both to have and to eat one’s cake.
Originally used as an implausible but popular argument that the UK could have the benefits of EU membership whilst leaving it, Cakeism came to define Jonson’s approach to governing. The UK could be committed to fiscal probity without constraining spending or raising taxes.
The government promised major spending projects such as HS2 (High Speed 2 railway line) and spending on “leveling up” (reducing the degree of inequality between regions), whilst also promising to cut taxes and reduce budget deficits. Affluent Conservatives in the
ECONOMY FEATURE BREXIT UK RECESSION
south east were promised tax cuts; the newly Conservative and formerly Labour constituencies in the north and midlands were promised better services and more government spending. The COVID crisis delayed confronting these contradictions.
According to Wilson, as in most developed democracies, the imperatives of containing the virus through lockdowns without devastating the economy resulted in large increases in government spending. As concern about COVID diminished, the consequences of the crisis measures on the budget became clear. "Government expenditure as a percentage of GDP was higher than when Mrs Margaret Thatcher came to power in 1979", Wilson said.
Inflation carried more and more people into higher tax brackets and taxation was equivalent to the highest percentage of GDP since the Second World War. The British had acquired a very unsavory cake to eat and keep; high taxation, high taxes and high budget deficits. There was widespread agreement that key government services such as the National Health Service (NHS) were creaking under the strains of underfunding. To make matters worse, GDP is estimated to be about 5% lower than it would have been had the UK stayed in the EU. "Because of Brexit and Johnson's policies, the UK had the lowest growth rate amongst advanced democracies. There was no prospect of the UK growing its way out of its problems", Wilson said.
Johnson's fall
According to Wilson, the fall of Boris Johnson was superficially related to these issues. Johnson’s conviction for breaking rules on limiting social gatherings his government had created and a series of events during which he proved incapable of telling the truth were more directly related to his departure. However, Cakeism was another and deeper example of Johnson’s dishonesty, concealing from the public the hard choices that must be made. "As the contest to replace him has unfolded, the contradictions of Cakeism became apparent. Candidates were differentiated on the basis of whether they were more concerned about cutting expenditure, reducing government deficits, maintaining “leveling up” or cutting taxes. Avoiding difficult choices had been the core of cakeism. It had been the basis of Johnson’s triumph on the 2019 General Election, adding formerly Labour constituencies to the Conservatives’ base in southern England. It was apparent, however, that cakeism was no longer possible", Wilson said. "Moving on from cakeism will be difficult. The British have long and plausibly been accused of wanting Scandinavian levels of government services and American levels of taxation. Boris Johnson told voters that living this dream was possible. The reality is that it is not", Wilson added.
Rise in Inflation
Meanwhile, Emad Mohammad a Financial analyst at Hamilton, Ontario told International Finance that after Johnson's resignation the inflation will increase more than other countries. He said that an inflation rate of 9%, which is at a 40-year high, is putting pressure on Britain. The BoE predicts that it will reach 11% later this year.
In April, the IMF predicted that the UK would experience slower growth
- Graham K. Wilson
and more persistent inflation than any other large economy in 2023. "The recent decline in the value of the pound has intensified inflationary pressures, the idea of higher government spending or tax cuts to boost the prospects of the Conservative Party helped to boost the pound a little. But whoever succeeds Johnson will only be able to mitigate the effects of the spike in food and energy prices to a limited extent", Mohammad said.
According to Mohammad, whoever replaces Johnson will have to make important fiscal and spending choices that may lessen the likelihood of a recession but potentially may raise the risk of inflation.
Mohammad said that Rishi Sunak had disagreed over policy with Johnson, who had long pushed for more tax cuts. Sunak's short-term priority before he resigned was to ease the burden of Britain's debt, which jumped above two trillion pounds during the coronavirus pandemic.
Priti Patel and Liz Truss, who
served as Johnson's interior and foreign ministries, are expected to argue for immediate tax cuts and more expenditure, while Sunak and the former health minister Sajid Javid are believed to be more fiscally conservative, according to analysts at US bank Citi. They will make decisions with significant long-term repercussions.
According to Britain's budget watchdog, if future administrations do not tighten fiscal policies, debt may more than quadruple to over 320% of GDP in 50 years.
Fiscal support
According to a CNBC report, Modupe Adegbembo, G-7 economist at AXA Investment Management, said a key question is whether Johnson uses his 'caretaker' period as prime minister — should he be granted one — to push through short-term fiscal policies.
Adegbembo said, when a new Prime Minister is appointed, we see an increased likelihood of additional fiscal spending and/or tax cuts.
The potential to accelerate income tax cuts penciled in for 2024 may be floated by some candidates, although remains challenging in the light of public finance developments.
Her comments were echoed by strategists at UBS, who said a change in leadership makes further fiscal support more likely as a new prime minister will “want to prove themselves.”
“Any additional support for the UK economy would come at an opportune moment: The GDP growth estimate for March was –0.1% compared to February, and for April it was –0.3% versus March,” UBS CIO Mark Haefele’s team said.
“Another increase to the energy price cap means there is further pressure ahead, but while our base case is that the UK will narrowly escape recession, it is important to remember that the FTSE 100 generates just 25% of its revenues inside the UK", the team added.
Bank of England
The central bank of the United Kingdom
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UK RECESSION
has increased interest rates five times since December, the steepest run of increases in 25 years, and it has indicated it would continue to do so at its next meeting in August, possibly by as much as half a percentage point.
However, recent reductions in investor betting on that kind of significant shift by the BoE are due to the prospect of a worldwide economic slowdown. Another reason to exercise caution could be the ambiguity around the course of Britain's fiscal policy.
More chaos?
While Johnson's departure marks the end of another chapter in one of the most turbulent periods in modern British political history, it is unclear whether his successor will be able to bring order to the situation.
Kallum Pickering, an analyst at Berenberg said Britain's economy would benefit if Johnson was replaced by "a more diligent and serious individual". But the Citi analysts said they were skeptical that the different factions within the Conservative Party would unify around a clear strategy. "In the months ahead, we see a UK heading into a once-in-a-generation squeeze in living standards, absent a defined strategy, and facing deep governmental division. The risk of profound policy error is therefore significant," they said. "An early election should also not be discounted, though we still expect a contest only in 2024", they added.
