Consumer resilience under threat as mortgage costs spiral

Retail bellwether Next shot to the top of FTSE 100 risers today thanks to an unscheduled trading update which celebrates the resilience of the British consumer.

The high street stalwart delighted investors with its upgraded profit forecasts, partly attributing the positive news to recent warm weather which has sent shoppers flocking to update their wardrobes.

But whilst shareholders will be rubbing their hands, those about to sit around the table at the Bank of England’s next MPC meeting might be less than impressed. 

Members who have spoken out about the need for pay restraint might have chosen some pretty inopportune phrasing at times, but the crux of their argument was that if employers put extra money into workers’ pockets they would keep spending it, and Next’s tills aren’t the only ones that have been ringing.

The revelation that pay growth in the three months to April came in at a stonking 7.2%, even if real pay wasn’t cutting the mustard, sent market expectations of further rate hikes through the roof.

Today remortgaging to keep that roof has shot up over 6% for a 2-year fixed deal, leading to fears that many homeowners will find themselves struggling to cover their increased payments.

But as we’ve seen with this whole inflation story, there will be a lag before the real impact is felt on the UK economy.

Sainsbury’s, Tesco and Marks & Spencer all saw shares fall today as the big supermarket price war picks up pace.

Looking at wholesale food prices there will be a number of areas where the price cuts have come about because costs are falling, but there will also be a whole lot more cash being injected by the stores themselves in a bid to win over increasingly savvy and irritated shoppers.

The next few days will bring a little more clarity to the UK’s inflation story, but the Bank of England’s upcoming decision looks crystal clear.

It will have to raise rates higher, and with the expectation that the headline CPI number isn’t likely to fall by much, the post rate-hike press conference will be pored over avidly for any sign the current market expectation, which sees a 50/50 chance of the base rate ratcheting up to 6% by the end of 2023, is off the mark.

The consumer has been resilient but will they remain so in the face of this new cost-of-living crisis, and will the government be forced to U-turn on its current stance of non-intervention?

Danni Hewson is head of financial analysis at AJ Bell