Client Update - 28th June 2024

With just under a week left before voters in the UK head to the polls on July 4th for the country’s first general election since 2019, reports suggest that most Britons currently see the state of the UK in relatively bleak terms, with a survey by US based ‘Sapien Labs’ ranking the UK as the second most miserable place globally. But with the weather finally starting to look like summer, inflation hitting the Bank of England's (BoE’s) target for the first time in almost three years, our cricket team reaching the T20 World Cup semi-final, the Three Lions advancing past the group stages in the Euros, and Emma Raducanu is now fit again and playing well in time for Wimbledon - is life for us Britons really that bad?

While inflation growth in the UK has been decelerating, a phenomenon known as ‘disinflation,’ the reality of higher prices and the cost-of-living crisis remains a significant challenge for many. A key indicator of this is the recent surge in credit card balances. According to the ‘Financial Times,’ outstanding balances on credit cards in the UK have increased nearly 10% in the last year as people struggle to cover costs. This month, inflation growth has finally fallen to 2%, aligning with the Bank of England’s target. However, this does not mean that prices are decreasing; they are still rising, albeit at a slower pace. The positive aspect is that this reduced rate of price increase is unlikely to cause the same shock to households and businesses that we have experienced over the past year. Nevertheless, as the nation approaches the election, concerns about inflation and high interest rates remain among the top issues for Britons, second only to the struggling NHS, prompting many to question whether prices will ever decline.

Occasionally, the prices of goods and services may fall slightly compared to the previous month, but, while this may seem like a good thing, it is not necessarily a positive development. Economics 101 teaches us that if people expect that prices are likely to decrease, they may delay spending in hopes of obtaining a better deal later. This behaviour leads to reduced income for businesses, which may then seek to cut costs by reducing wages or laying off staff. Consequently, falling prices can result in job losses, which in turn can cause prices to drop further. This phenomenon, known as ‘deflation’, represents a different kind of economic crisis that brings its own challenges. Japan, having recently emerged from a deflationary period that lasted about 15 years, is acutely aware of the negative impact such a situation can have, making a region less attractive to investors and causing significant unemployment. Therefore, the Bank of England (BoE) aims for a consistent 2% inflation rate as it prefers to risk a bit of inflation than to face the adverse effects of falling prices and a weakening economy that is unattractive to outside investors.

The BoE appears to be achieving this target and, according to an article by Bloomberg analysts, is even outperforming its peers in doing so. While the BoE remain reserved, the UK is currently experiencing fewer price pressures compared to France, Germany, and the US. The article commends the BoE for its honesty and clarity. Unlike the Federal Reserve and other central banks, which the article claims have sometimes projected a false sense of precision, the BoE has been candid about the unusual uncertainty in today's policymaking. Additionally, the BoE has been praised for its openness to commissioning external reviews of its forecasts and for being the first major central bank in the advanced world to include external appointments on its policymaking committee.

Despite this, the BoE’s recent decision to leave interest rates steady amid falling inflation has been met with some scepticism with some economists arguing they are playing things too safe. Many have drawn parallels between the BoE and Gareth Southgate’s England team, criticising both for their slow and cautious approaches. However, while both have been teased for their conservative strategies, it is important to acknowledge their successes. Numbers suggest that the BoE has effectively reduced inflation and stabilised the economy. Meanwhile, in Germany, although the Three Lions' performance has been less than thrilling, they have progressed to the knockout stages. While both have played it safe so far, we remain hopeful that a shift in strategy, to inject more pace, might be on the horizon for both the BoE and the Three Lions, making their next moves highly anticipated.

Have a good weekend.