Are UK Retail Inflationary Pressures Finally Under Control?
Holiday trading across most of our coverage has been strong, given the non-discretionary nature of the first uninterrupted holiday since 2019. We expect this to have been funded by a sharp rise in unsecured credit in December 2022.
Higher property costs could be a drag on UK household consumption. 30% of UK properties are mortgaged, and 43% of UK mortgages will reprice over 12m, resulting in a 50% increase in overall mortgage costs. In addition, 37% of UK properties are rented, with rents rising just 3.9% in the year to November 2202. However, with most rental agreements tied to RPI/CPI, private-sector deals are rising rapidly. Even with Government social housing rents capped at +7% in April 2023. Rental inflation will accelerate through 2024.
Energy and food inflation should remain elevated in 2023. The UK energy cap of £2,500pa +96% Y/Y came into effect in 4Q, rising to £3,000 in 2Q. Despite falling wholesale gas prices, it looks unlikely that the cap will fall materially before 2024. Likewise, despite falling commodity prices, we see no immediate signs of food inflation easing, given many price increases are yet to be fully passed through. This delayed price increase disproportionately affects lower-income households, with UK CPI for lower-income UK households at 12.6% (vs. 9.6% for higher-income households) in October 2022.
The inclination to smooth expenditure through further borrowing could be reduced by falling property prices and rising unemployment, and we note retail sales comps are demanding in spring/summer, especially in apparel as “revenge spend” annualises, while home-related spending may be vulnerable.