The Three Lions: Inflation, Shrinkflation & Stagflation
The United Kingdom may have celebrated the three lions during last summer's Euro football tournament but the next few months may present a less welcome kind of three lions.
INFLATION The latest UK Consumer Price Index (CPI) data - a key measure of inflation - surged by 3.2% in the last 12 months. The previous month's reading showed the largest ever month-on-month increase since records began in 1997. All this comes at a time of rising energy prices and is, according to the Bank of England's Chief Economist, expected to worsen to above 5% by year-end. Some components of CPI, such as used cars have already gone up by 18.3%.
Rising input costs such as labour, components and shipping costs often cause manufacturers to reduce the size of unit packages; while keeping the price the same or even raising it slightly. In effect, they hide the price rise by reducing the quantity on offer. This is particularly common in food. And a reduction in the quantity of a product usually sold as a packet of 10 units to 8 units is equivalent to a 20% price increase. This is known as shrinkflation and the current economic conditions are ripe for this trend. During the Financial Crisis, stores that offered single-fixed-pricing for all goods (e.g. by charging £1 or $1 for every product) saw profits skyrocket because of the savings illusion created by shrinkflation.
When slow economic growth; rising inflation and increasing unemployment occur at the same time this is known as stagflation or in short: misery. The British economy is making significant moves towards stagflation. At present, low economic growth and rising inflation are clearly observable and unequivocal. The third factor: rising unemployment is unclear at this stage because unemployment is a "lagging economic indicator" whose effects will take time to reflect in official statistics. Heritage Pay analysts will continue to pay close attention to stagflation signs in the months ahead.
Sterling strength or weakness in the months ahead will be a useful indicator of the economy's direction of travel.
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None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.