Fears of repeat of 1970s-style stagflation; UK grocery inflation falls to 11%

Key events

Kantar’s latest grocery healthcheck shows that German discounters Aldi and Lidl reported strong sales growth of 14.9% and 15.2% respectively while Tesco and Sainsbury’s both enjoyed sales growth above 9%.

Victoria Scholar, head of investment at interactive investor, explains:

Facing an uphill battle against a declining propensity to spend among consumers, the supermarkets have been desperately cutting their prices this year to attract customers through their doors. This has helped to reduce the overall level of supermarket price inflation with some staple foods now falling in price.

The cheaper German discounters have benefitted from shoppers’ increased price sensitivity. Many are desperately seeking out bargains and are trading down to cheaper ranges away from more expensive, branded items.

Nonetheless, some food prices are still rising according to Kantar such as eggs and frozen potato products.”

The unusually warm September weather has boosted sales volumes of ice cream by 27%, Kantar reports.

Late-season barbecue action lifted burger sales by 19%, while dips were up 1%.

Sun cream sales more than doubled compared to August, which was a rather damp month.

Kantar’s Tom Steel adds:

Christmas seemed further away for many with fewer people buying Christmas puddings and seasonal biscuits as volume sales were down by 14% and 29% versus this time last year.

UK grocery inflation falls again as prices of some staple items drop

Shoppers buy products in Asda supermarket in London as UK inflation rises to 10.1% due to rising food prices. — Photograph: Anadolu Agency/Getty Images

Newsflash: UK grocery inflation has dropped back to its lowest level in over a year, as price pressures have eased.

Prices across grocers were 11% higher than a year ago in September, down from 12.2% in August, data provider Kantar reports.

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That’s the lowest level since July 2022, and the seventh monthly decline in a row, since grocery inflation peaked at a record 17.5% in March.

However, it still means food prices are rising faster than average wages (+8.5%), and by over five times the Bank of England’s 2% target for overall consumer price inflation.

Kantar reports that the prices of some staple foods are now dropping, for the first time since last year, with the average price of a pack of butter now 16p less than a year ago.

Supermarkets are also pitching more offers to customers, pulling down prices.

Tom Steel, Kantar’s strategic insight director, says:

Supermarkets are looking at all the different ways they can deliver value at the tills and while the emphasis for some time has been on everyday low prices, the retailers are starting to get the deal stickers out again.

Spending on promotions made up over a quarter of all sales in the latest 12-week period at 26.5%, the highest level since June 2022.

US Treasury bonds see best day since March

The dash for safe-haven assets is helping to pushing down the interest rate on US government bonds today.

The yield on US Treasuries have tumbled in Asia-Pacific trading, in the biggest one-day move since March, as bond prices jumped.

🚨 🚨 BREAKING: Treasuries are having their best day since March, with 10-year yields down as much as 18 bps after dovish comments from Fed officials and as conflict in the Middle East fueled a flight to safety. Traders are betting the Fed’s most aggressive tightening cycle since… pic.twitter.com/FbII3HkuB4

— Algomasters.com (@BluePhoenixFin) October 10, 2023

This bond rally suggests that bond investors may be hopeful that US interest rates could be at or near their peak. Fears of further increases triggered a rout in bond prices last week, sending yields to 16-year highs.

Yesterday, Dallas Fed president Lorie Logan said on Monday that the recent rise in long-term U.S. Treasury yields, and tighter financial conditions more generally, could mean less need for the Federal Reserve to raise interest rates further.

Treasuries sell-off…Fed say market’s done their job for them…Treasuries rally…Fed’s job no longer done…like the circle of life…

— Michael Brown (@MrMBrown) October 10, 2023

Yesterday, European government bonds recovered some ground, after the recent selloff which attracted comparisons with the run-up to the stock market crash of 1987.

Britons cut back on eating out and takeaways to save for festive splurge

Mark Sweney

Cash-strapped Britons are cutting back on eating out and reining in on buying takeaways to save up for the expensive Christmas season splurge.

The amount spent on going out to restaurants plunged 10.8% month on month in September, a significant slowdown compared with the decline of 5.8% registered in August, according to the latest UK consumer card spending figures from Barclays.

The growth in the amount the public spent on takeaways has also slowed dramatically, from 9.2% in August to 6.5% last month, as 44% of Britons surveyed said they are starting to reduce discretionary spending to pay for Christmas.

Deutsche Bank warns of 1970s-style stagflation risks

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Could the world be heading for a repeat of the stagflation of the 1970s?

50 years ago, inflation remained stickily over target, industrial action gripped countries such as the UK, energy prices spiked, and there was war in the Middle East.

And today, analysts at Deutsche Bank see certain comparisons. In a research note out this week, Deutsche’s Henry Allen and Cassidy Ainsworth-Grace there are a “striking number of parallels” between the 1970s and our own time:

They write:

Inflation remains above target across the major economies; we have witnessed severe spikes in energy prices over recent years; and there’s been growing industrial unrest.

Over the weekend, the attacks on Israel showed how geopolitical risk can return unexpectedly. And we are also seeing an El Niño event this year, which echoes a similar event in the early 1970s that put upward pressure on food prices.

The biggest single cause of the stagflation of the 70s was the oil shock, when the OAPEC group imposed an oil embargo during the Yom Kippur War.

It sent much of the Western world into recession, and it took many years before price stability returned, Deutsche point out.

Although oil jumped yesterday, after the Israel-Hamas war began, crude prices are still below the $100/barrel mark.

Recent interest rate increases, and the easing of supply chain bottlenecks, could also cool inflation.

But, Allen and Ainsworth-Grace say, there are “very strong” reasons for caution, and to avoid complacency.

Inflation is still above target in every G7 country, and the 1970s showed how unexpected shocks could rapidly send inflation higher once again. History also suggests that the last phase of returning inflation to target is the hardest.

And given inflation has already been above target for the last two years, a fresh inflationary spike could well lead expectations to become unanchored.