US inflation hits 7% for first time since 1982; cost of living squeeze continues – as it happened

The jump in US inflation to 7% will have consequences.

Increases in interest rates are inevitable, explains our economics editor Larry Elliott, but the Fed would be wise not to move too fast.

Not since Ronald Reagan was president and Paul Volcker was the hardline chairman of the Federal Reserve has US inflation been as high as 7%, so inevitably the latest jump in the country’s cost of living index will have consequences.

The US central bank has historically tended to fear deep recession more than runaway inflation, scarred as it still is by the legacy of the Great Depression. The Fed, however, cannot ignore the risks of a wage-price spiral developing and will be forced to act.

In part, that’s because of what’s been happening to core inflation, a measure that strips out volatile elements of the consumer prices index such as fuel and food. This rose sharply in December to an annual rate of 5.5%, making it harder for the Fed to argue inflationary pressures will be fleeting. The price of used cars, clothes and air fares all registered hefty increases.

Here’s Larry’s full piece:

Related: Highest US inflation in 40 years signals end of ultra-cheap money

While US inflation is a near 40-year high, US interest rates are still at historically low levels, as this chart shows:

AJ Bell investment director Russ Mould says:

“Just because inflation was no higher than economists had forecast at 7% year-on-year for December does not mean that investors or central bankers can relax. The last time inflation was this high in the USA, back in summer 1982, the effective Federal Reserve Funds Rate stood at north of 14%.

“Nor was the central bank running a balance sheet that has doubled in size in two years and grown by a factor of ten over the last twelve years, thanks to Quantitative Easing policies designed to fight the Great Financial Crisis and the pandemic, among other things.

“In that context, any notions that current Fed chair Jay Powell is talking or acting tough when it comes to inflation seem entirely fanciful. In real – post-inflation – terms, the effective Fed Funds Rate has never been lower.

© Provided by The Guardian
The real US effective Fed Funds rate

Leading shares in London have closed at their highest level in nearly two years.

The blue-chip FTSE 100 has ended the day 60 points higher, or +0.8%, at 7551.72 points, the highest close since January 2020.

Copper producer Antofagasta (+7.5%) led the risers, followed by fellow miners BHP Group (+4.5%), Anglo American (+3.9%) and Glencore (+3.5%).

BP also rallied, up 3.2%, lifted by the jump in crude prices, while supermarket chain Sainsbury’s gained 3.1% after lifting profit forecasts this morning.

European stock markets also rose, as optimism over the economic recovery appear to outweigh worries about inflation.

David Madden, market analyst at Equiti Capital, explains that equities are benefitting from a dip in US government bond yields. Yields (or interest rates on the bonds) jumped this month, as traders anticipated three US interest rate rises this year.

The sharp rise in the cost of living is one of the reasons why the US central bank has adopted a more hawkish position recently. Although it is worrying that costs are rising, at least the rate at which they are increasing seems to be cooling, after all, it was only a 0.2% rise.

Last week it was confirmed the unemployment rate fell to 3.9%, the lowest level since the pandemic began. The impressive rebound in the labour market is also why the Fed is moving towards lifting rates. There are some concerns in the markets the rate hikes from the Fed might tip the economy into recession, which is part of the reason why stocks suffered at the start of the week

Could inflation in the UK soar as high as 7%?

The UK consumer Prices Index (CPI) rose by 5.1% in the 12 months to November 2021, and the Bank of England has forecast it will hit 6% this spring, when energy bills rise.

But America is a timely example that prices can rise much faster than policymakers think.

Kevin Brown, savings specialist at ScottishFriendly, says:

“Prices started spiking in the US in April and at the time the Fed hoped that rising inflation would be temporary, but it has become clear that intervention is needed to bring it under control. A series of rate rises are expected this year, but it is unclear how long it will take for prices to begin to fall.

“A very similar picture is emerging in the UK and all eyes will now be on the latest ONS inflation data for December to see whether the emerging cost of living crisis can be brought under control.

“There are fears that inflation could hit 7% here in the UK too which would hurt the thousands of households who are already feeling the pinch and have very little spare change left at the end of the month.”

The pound has hit a new two-month high against the dollar, as the US currency eases back despite the jump in inflation.

Sterling has touched $1.3690, for the first time since 4th November (when it tumbled as the Bank of England surprisingly didn’t raise interest rates, although it did act in December).

© Provided by The Guardian
The pound vs the US dollar Photograph: Refinitiv

Victoria Scholar, head of investment at interactive investor, suggests the pound could have further to climb:

It looks as though the markets had already priced in today’s strong US inflation reading so much so that the US dollar in fact continued to push lower against the pound, extending the recent uptrend for cable.

GBPUSD has gained more than 3.5% off the December trough, breaking above key resistance at $1.35 with the next major resistance hurdle at $1.38.

This week’s price action has seen a break above the medium term descending trendline that has been in play since June. The creation of a higher low and a push above that trendline resistance potentially paves the way for further bullish price action ahead.

The price of goods and services in the US continue to rise at rates unseen in decades, jumping 7% in December compared to the same month last year – the seventh consecutive month in which inflation has topped 5%.

The news represents a blow to the Biden administration and the Federal Reserve, which until recently have characterized soaring prices as a “transitory” phenomenon brought about by supply chain issues triggered by the pandemic.

On Wednesday, the labor department said the consumer price index (CPI) – which measures what consumers pay for a wide range of goods – rose 0.5% last month compared with November and 7% compared with December 2020.

Price increases in housing and used cars and trucks were the largest contributors to the inflation rate, with 0.4% and 3.5% increases in price compared with November, respectively. Food prices also continued to increase, though the 0.5% jump in prices is not as high as increases seen in previous months.

Disruptions to the global supply chain caused by the pandemic are still causing shortages and driving up the price of goods, from cars to meat and furniture. In November the average price of a used vehicle in the US was $29,011 – 39% more than just 12 months earlier.

Here’s the full story:

Related: US inflation jumped 7% in December as prices rise at rates unseen in decades

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The floor of the New York Stock Exchange. Photograph: Spencer Platt/Getty Images

Wall Street has opened higher, as investors reacted calmly to the news that US prices are rising at the faster rate in almost four decades.

The Dow Jones industrial average has gained 0.3%, or 114 points, to 36,366 points.

The tech-focused Nasdaq has gained 0.5%, having wobbled last week when anxiety over the prospect of US interest rate rises hit markets.

Today’s reaction shows that traders had already priced in today’s CPI reading, and are reassured by Fed chair Jerome Powell pledging yesterday not to allow inflation to become entrenched.

Housing costs will be crucial in determining whether US inflationary pressures ease this year, says Erik Norland, senior economist at CME Group:

Looking inside of the data, housing, which accounts for over a quarter of the index, rose at 5.1% year on year while the main drivers of price increases remained gasoline (+49.6% year on year), transportation (+21.1% YoY), new vehicles (+11.8% YoY) and used cars and trucks (+37.3% YoY).

Food and apparel prices have risen at close to 6% YoY. Below average price increases came from medical care, education and recreation whose prices rose between 1.5% and 3.3% during the past year.

Looking ahead, used car and truck prices may be close to a peak – they typically rise during periods of economic downturn and fall during expansions. However, housing costs remain a significant upside risk.

While rents have risen only around 4-5% during the past year, the cost of buying a home has risen by around 20%. Sometimes in the past purchase prices for homes has lead rent costs by as much as one year. As such, housing costs will be critical to seeing whether or not overall inflation abates in 2022 after 2021’s 7% pace which was the highest in 40 years.”

Hinesh Patel, portfolio manager at Quilter Investors, fears that US inflation is becoming ‘stickier’:

“While inflation was predominantly feeding through from the automotive, energy and pandemic-hit sectors, this is now moderating which makes the 7% figure all the more startling.

Healthcare and housing/rental costs are likely to push higher and means it has now become stickier than first feared.

America isn’t the only country facing high inflation, of course, but price pressures are particularly intense in the States.

Yesterday, the OECD reported that inflation in its 38-strong group of rich countries rose to 5.5% in November, with the US ahead of the pack with annual CPI of 6.8%.

Neil Birrell, chief investment officer at Premier Miton Investors, warns that there’s no immediate respite from rising prices:

“At 7.0%, the December CPI number in the US has got to a level that should focus the minds of investors and the Fed on a possible rate rise in March. It’s likely that there will be more upward pressure coming from supply side bottlenecks this month and maybe next, so there is no immediate respite.

The inflation spike is being felt in most regions, although China and Japan are notable exceptions, and it will stay top of the agenda for a couple of months yet.”

Seema Shah, Chief Strategist at Principal Global Investors, also thinks US inflation could have peaked — but at a painfully high level.

“Inflation at 7% is no joke. It’s the highest annual CPI number since 1982 and driven not by energy prices, but by just about everything else. Yet, December’s number could mark the peak for annual inflation readings. Not only are the base effects starting to fall out of the annual comparisons, but there are growing signs of supply strains easing, with freight rates coming down, delivery times shortening, and backlogs reducing. This should mean that the most acute price pressures start to fall back in coming months, suggesting a more digestible run of CPI readings are in the offing in the coming quarters.

“For the Fed however, a 7% figure will inevitably make for uncomfortable reading. Chair Powell believes that there is no need to rush to get back to neutral, but today’s number will increase pressure on the Fed to get monetary policy tightening off the starting block.”

The jump in US inflation underlines the pressure on America’s central bank, the US Federal Reserve, to start raising interest rates in the coming months

Richard Flynn, Managing Director at Charles Schwab UK, explains:

Today’s rise in the rate of inflation falls within investors’ expectations. It’s clear that both the virus and the recent inflation surge have put a big dent in measures of consumer confidence. There are rampant fears of stagflation akin to the 1970s, but the good news for now is that unemployment is not on the rise.

Nevertheless, assuming no significant hit to economic activity from Omicron, nor a surprise-retreat in inflation, the Fed may come under pressure to tighten monetary policy as we head further into 2022. Based on history, it’s not the timing of the first-rate hike that matters, it’s the trajectory and speed once rate hikes begin.”

US inflation may have peaked at 7% in December, suggests Paul Ashworth, Chief US Economist at Capital Economics.

But he also cautions that pandemic disruption, bad weather, and the pick-up in oil prices will all push up the cost of living this month.

With crude oil prices rebounding substantially in recent days, gasoline prices will rise again in the January CPI. Food prices increased by a slightly more modest 0.5% m/m in December, but that relief may be temporary too.

The latest media reports of empty grocery store shelves in the Northeast – caused by Omicron staff absenteeism and the disruption from winter storms – points to renewed upward pressure on food prices.

Excluding food and energy, core prices increased by a stiff 0.6% m/m. Used vehicle prices increased by 3.5% m/m and new vehicle prices increased by 1.0% m/m.

Ashworth also warns that the price pressures from supply chain problems, such as semiconductor shortages, may not ease soon.

They have led to shortages of new cars, pushing up costs of used autos and trucks by 3.5% in December, and 37.3% over the last year.

Ashworth adds:

Clothing prices increased by 1.7% m/m, as the knock-on impact from the earlier delta-linked disruption to production in Asia and West Coast port congestion continued.

More recent Omicron-linked staff absences probably explain the 2.7% m/m increase in air fares and the 1.2% m/m increase in lodging away from home.

Related: Over a thousand more US flights canceled amid Omicron Covid surge

Here’s a great breakdown of the steep price rises pushing US inflation higher, from Washington Post’s Heather Long.

More snap reaction to the news that US consumer prices are rising at their steepest rate since 1982:

© Provided by The Guardian
US CPI inflation continued to rise on a monthly basis, up 0.5% in December… Photograph: US Department of Labor

© Provided by The Guardian
…lifting the annual rate to the highest since June 1982 Photograph: US Department of Labor

Shelter (housing costs), and used cars and trucks were the largest contributors to the jump in US inflation last month, the Labor Department says.

Food prices also kept rising, up another 0.5% in December.

Household furnishings and operations, apparel, new vehicles, and medical care all increased in December, the inflation report says.

But….the energy index declined in December, ending a long series of increases. It dropped by 0.4% last month, as the indexes for gasoline and natural gas both decreased. That could bring some relief to motorists.

But over the last 12 months, energy prices have surged 29.3%, while food prices have jumped 6.3%.

Core inflation in the US, which strips out food and energy, rose by 5.5% per year in December – as Victoria Scholar, head of investment at interactive investor, shows:

Just in: US inflation has jumped to 7% as the cost of living squeeze in America intensified.

Consumer prices rose by 0.5% in December along, lifting the annual inflation rate to 7.0%.

That’s the highest reading since June 1982, during Ronald Reagan’s first term as US president.

More to follow!

The head of the International Energy Agency has accused Russia of undermining gas supplies to Europe, at a time when “geopolitical tensions” between Moscow and the West are rising.

Fatih Birol said today that the Paris-based energy watchdog believes Russia is contributing to Europe’s gas shortage, which pushed up wholesale prices to record levels last year.

Birol argued that Russia could increase deliveries to Europe by at least one-third through abundant spare capacity.

Russia, though, has denied using gas as a lever over the West, at a time when tensions over Ukraine have risen.

Related: Ukraine talks: Russia sees no grounds for optimism ahead of Nato meeting

Reuters has the details:

“We believe there are strong elements of tightness in Europe’s gas markets due to Russia’s behaviour,” Birol told reporters, noting “today’s low Russian gas flows to Europe coincide with heightened geopolitical tensions over Ukraine”.

Russian gas company Gazprom reduced exports to Europe by 25% year-on-year in the fourth quarter of 2021 despite high market prices and reduced spot sales while other exporters boosted them, Birol said.

“The current storage deficit in the European Union is largely due to Gazprom,” he added. “The low levels of storage in company’s EU-based facilities account for half of the EU storage deficit although Gazprom facilities only constitute 10% of the EU’s total storage capacity.”

Birol also suggested that the high energy prices and consumer pain created by the gas crunch makes the case for future mandatory storage quotas for European companies.

Whitbread, the owner of the Premier Inn hotel chain, is warning that it expects cost inflation for the hospitality sector to reach between 7% and 8% over the coming months.

Higher labour costs, rising energy bills and increased construction costs for its new hotels are putting pressure on the FTSE 100 company, according to Whitbread’s chief executive, Alison Brittain.

The group said it expected to offset these increased costs through charging higher rates for rooms in its 800 Premier Inn hotels, as well as through cost efficiencies and by growing its estate.

The company, which also owns restaurant chains including Beefeater, Bar + Block, and Brewers Fayre, said higher levels of inflation would affect about £1.4bn of its cost base until April 2023.

Here’s the full story:

Related: Whitbread plans to offset rising costs with higher Premier Inn room rates

Oil is heading back towards multi-year highs this morning, in another sign of inflationary pressures.

Brent crude, the international benchmark sourced from the North Sea, has risen to $84.20 per barrel, approaching the three-year high over $86/barrel set last October.

US crude is approaching $82/barrel – it hit seven-year highs last autumn, driven by rising demand, and the slow production increases coordinated by the Opec+ group.

Shares in Whitbread have nudged a little higher today, up 0.4%, and on track to close at a two-month high.

Neil Wilson of Markets.com says:

Whitbread shares were steady after it reported a solid Q3 marked by ‘resilience’ to Omicron.

Total UK sales rose 3.1% vs last year, but lockdowns are wrecking German occupancy rates, which have declined to 36% in the last 6 weeks from 60% in the third quarter.

Whitbread faces “a tough gig” until more corporate travel returns, and weddings, and stag and hen dos really pick up properly, he adds.

One third of UK consumers plan to reduce their household spending this year as inflation eats into their income.

A survey of 3,000 UK consumers found that 32% expect to cut back on their household spending in 2022, while just 9% plan to spend more.

With prices of staple goods and services such as food and energy rising, people are planning to cut discretionary spending such as eating out (55%), clothing (50%) and takeaways (49%). A third plan to spend less on holidays, while 26% aim to cut back on technology.

The survey also found that 26% of consumers hadn’t managed to save during the pandemic – a reminder that not everyone put money aside during lockdowns.

Linda Ellett, head of consumer markets, leisure and retail at KPMG UK, said the cost-of-living squeeze is hitting many households:

“Faced with inflationary pressures, some businesses are mulling upping their prices, or have done so. But they will be mindful that they are operating in a marketplace where consumers are themselves having to tighten the purse strings.

“The competition for share of wallet in 2022 is heating up. It’s vital that businesses double-down on their productivity, on the value and efficiency of their supply chain, and assess whether new products or offers can give them an edge in this landscape.”

The US competition watchdog can proceed with a breakup lawsuit against Facebook’s owner, a federal judge has ruled.

Mark Zuckerberg’s Meta, the parent of Facebook, Instagram and WhatsApp, had asked a court to dismiss an antitrust complaint brought by the Federal Trade Commission (FTC) for the second time.

However, Judge James Boasberg said on Tuesday that the FTC’s revised lawsuit should be allowed to proceed.

Boasberg, of the US District Court for the District of Columbia, wrote:

“Ultimately, whether the FTC will be able to prove its case and prevail at summary judgment and trial is anyone’s guess.

The court declines to engage in such speculation and simply concludes that at this motion-to-dismiss stage, where the FTC’s allegations are treated as true, the agency has stated a plausible claim for relief.”

More here:

Related: Lawsuit aiming to break up Facebook group Meta can go ahead, US court rules

Matt Britzman, equity analyst at Hargreaves Lansdown, says Whitbread is making a ‘continued recovery’ despite the impact of Omicron, as price rises loom:

It’ll come as welcome news to investors that Omicron doesn’t look to be having a major impact on demand for hotel rooms in the UK. Fresh testing requirements for overseas travel is likely to have helped here, with would be travellers forced to find a break closer to home.

The same can’t be said for the German hotels, which are being hit hard by restrictions and saw occupancy fall to 36% in the 6 weeks to 6 January. For now though, the region only makes up a very small part of the business, but it’s where a lot of the group’s growth prospects are pinned.

Food and beverage sales haven’t been quite as resilient, with restrictions across Scotland, Wales and Northern Ireland acting as headwinds. New menus and marketing strategies are being deployed in an attempt to breathe new life into this part of the business– it remains to be seen whether that’ll be enough to get back on track.

Inflation across the wider sector is expected to pick up into 2022, which’ll provide a challenge for many businesses and Whitbread won’t be immune. The company is hoping to be able to offset the majority of this with cost savings and pricing, and that’s where having a strong brand helps.”

Rising wages and energy costs are both key factors pushing up Whitbread’s costs, which could lead to prices at its Premier Inn hotels increasing this year (see earlier post).

The FT has a good take:

The majority of the impact will come from higher wage costs, said chief executive Alison Brittain, as hospitality businesses fight to attract and retain staff, many of whom left the sector due to uncertainty around the return of restrictions and lockdowns.

Whitbread raised employee wages by 5 per cent in October and Brittain said that for staff on hourly rates, the company “probably will go again on pay as we come into the spring”.

She also flagged “highly inflationary” energy bills and rising construction costs as other major sources of pressure.

Whitbread also hopes that cost cuts and new openings will mitigate sector inflation of 7-8% this year, alongside higher room rates.

More here.

In the City, the FTSE 100 index has hit its highest level in almost two years.

The blue-chip index hit 7551 points this morning, up 0.8%, its highest level since late January 2020 — before the pandemic hit global markets.

Mining stocks are leading the risers, with Anglo American (+3.8%), Antofagasta (+3.5%) and BHP Group (+3.5%) benefitting from optimism over the global recovery. The jump in the oil price has also lifted energy producers.

© Provided by The Guardian
The FTSE 100 over the last two years Photograph: Refinitiv

Investors look to be regaining their confidence after a choppy start to 2022, explains Russ Mould, investment director at AJ Bell:

“Driving confidence were remarks by Federal Reserve chairman Jay Powell that the central bank would do everything it could to stop inflation running out of control.

The top FTSE 100 six risers were all metal producers, and this sector is a bellwether for global economic activity.

“Risk appetite appears to have returned given how more stodgy companies like BT, Reckitt Benckiser and Imperial Brands were among the fallers on the FTSE. Instead, investors were more interested in bidding up some of the tech plays which have been beaten up recently, including Scottish Mortgage.

“Also in vogue were a slew of consumer-facing companies riding high after upbeat trading statements. These included Sainsbury’s which upgraded its profit guidance, and Whitbread which said it continued to trade ahead of the market.”

The FTSE 100 is still below its record high of 7903 points set in 2018, unlike the US and major European indices which hit record highs last year.

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A Dunelm store in St Albans

In a busy morning for retail news, homewares and furniture retailer Dunelm has also lifted its profit forecasts.

Dunelm reported that it had a record quarter with strong performance across all channels. Sales grew 13% in the 13 weeks to Christmas Day, and were 26% higher than pre-pandemic levels in 2019.

Dunelm had benefitted from the boom in online shopping since Covid-19. Digital sales have doubled compared to two years ago, while it also saw “particularly encouraging” store growth.

Chief executive Nick Wilkinson said Dunelm’s “fantastic colleagues and supplier partners” had kept customers served despite the challenges of Covid and industry-wide supply chain disruption

Wilkinson adds:

“Whilst there are several macro uncertainties to be navigated, we feel well placed to continue to deliver profitable growth across all channels and grow market share as the 1st choice for home for UK homelovers.”

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A branch of Savills estate agents in Islington, London. Photograph: May James/Reuters

Estate agents group Savills has seen ‘extraordinarily strong’ demand in recent weeks, as it lifts its profit forecasts this morning.

Savills told the City this morning that its full year performance will be “very significantly ahead” of expectations, including a boom in expensive homes.

Since the trading update on 9th November 2021, the Group has experienced an extraordinarily strong final trading period, particularly in the UK and Asia Pacific regions alongside improved performances in Continental Europe and the Middle East, and North America; both of which have more than eliminated the losses of 2020.

Savills says it completed much more commercial capital transactions and prime residential (high-end) sales than expected, including in London.

The UK prime residential market continued to perform exceptionally strongly through the last quarter and volumes in the Prime Central London market clearly began to improve. Currently there is a definite shortage of sale stock, so despite outperformance in 2021, our expectation of a moderation of activity in 2022 remains intact.

© Provided by The Guardian
A branch of the Sainsbury’s supermarket in London this month

British supermarket group Sainsbury’s profits this year will beat expectations, after stronger-than-expected food sales over Christmas

Sainsbury’s raised its full-year profit forecast for the year to April this morning, saying that it had seen strong sales in the crucial Christmas period.

Sainsbury’s reported that stronger than expected grocery volumes, driven in part by increased in-home grocery consumption, helped to offset the jump in cost inflation.

Group sales in the last quarter didn’t match last year, when the pandemic led to a boom at grocers. Total retail sales (excluding fuel) were down 5.3% in the last 16 weeks.

Grocery sales dropped 1.1% in the quarter, but did grow 0.1% in the six-week Christmas period, or by 0.8% if you account for Sainsbury’s closing its stores on Boxing Day.

General Merchandise and Clothing sales struggled, down year-on-year in the last quarter.

© Provided by The Guardian
Sainsbury’s trading update Photograph: Sainsbury’s

Sainsbury’s now expects to report underlying profit before tax of at least £720m in the financial year to March 2022. That’s up from previous guidance of “at least” £660m, and an improvement on the £356m a year ago.

Sainsbury’s CEO Simon Roberts said it was challenging to ensure that products were available for Christmas, given the supply chain problems:

“We were bold in our plan for product, value, innovation and service and delivered volume growth ahead of the market. We delivered our best value food this Christmas, launched our lowest ever priced Christmas dinner heading into the key Christmas shopping week and we had our biggest ever New Year.

Customers also treated themselves and new Taste the Difference products in party food, desserts, wines and spirits were really popular and we had record sales of champagne and sparkling wines. Offering great value will be more important than ever this year and we have just launched our bold new Sainsbury’s Quality Aldi Price Match campaign, which targets 150 fresh products that customers buy most often.

Shares in Sainsbury’s have jumped almost 2%.

The boss of the UK’s largest energy supplier has said rocketing energy prices, which are adding to the soaring cost of living for British households, could last for as long as two years, my colleague Joanna Partridge writes.

Chris O’Shea, the chief executive of British Gas owner Centrica, said the energy market “suggests that high gas prices will be here for the next 18 months to two years”.

O’Shea told the BBC there was no reason to think that gas prices would start to fall again “any time soon”.

The rising global demand for gas is partly being driven by the energy transition, according to O’Shea, as countries move away from reliance on coal and oil.

“As we move towards net zero, gas is a big transition fuel, so as you turn off coal-fired power stations in other countries, maybe there is more demand for gas,” O’Shea said.

“There isn’t an abundance of gas that you can just turn on quickly, so I can’t say that this will be done in six months, or nine months, or a year.”

However, O’Shea said he did not believe that increasing the domestic supply of gas from the North Sea would help to solve the energy crisis.

“I’m not sure an increase in UK supply would have brought the price down from £3 a therm, as it was in December, from 50p as it was a year ago.

Here’s the full story:

Related: Centrica boss says high energy bills could last two years

JD Sports Fashion has joined Sainsbury’s in lifting its full-year profit forecast ahead of market expectations, after seeing strong sale of sportswear brands.

JD saw from robust demand during the Black Friday and Christmas period, and also benefitted from America’s fiscal stimulus package, which it estimates contributed up to £100m of profits.

Following “sustained positive” consumer demand, JD now expects pre-tax profit of at least £875m in the year to 29 January 2022, ahead of current market expectations of £810m.

CEO Peter Cowgill has joined the chorus of politicians and business leaders urging chancellor Rishi Sunak to rethink looming tax rises, the Evening Standard reports.

Cowgill told the Standard:

“The imposition on businesses this year, at a time when you’ve got such wage inflation in any event, is pretty strong. You’ve got the imposition of national insurance and you’ve got the increase in corporation tax as well. That impacts on retained profits for investment.

“I would certainly question it, very much so”

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The Premier Inn Hotel and Brewers Fayre at the Durham North. Photograph: Lee Smith/Reuters

Premier Inns owner Whitbread has warned that cost inflation could hit 8% in the coming year.

Whitbread, which also runs pub chains including Beefeater and Brewers Fayre, says that costs are expected to be higher than average. It currently expects sector inflation rate in the year to April 2023 to run at around 7-8%.

Whitbread expects to ‘largely offset’ this inflation surge, through cost efficiencies, estate growth and higher prices (average room rates) — suggesting consumers will see an impact.

Hospitality firms have been hit by a surge of costs in recent months, including higher energy bills and supplies, and rising wages.

In a third-quarter trading update, chief executive Alison Brittain said Whitbread achieved a “strong performance” in the UK in the last quarter, but that conditions were challenging in the pub and restaurant sector:

High levels of leisure demand and improving business demand helped maintain like-for-like accommodation sales ahead of pre COVID-19 levels.

UK accommodation sales remained resilient in December, albeit softening as we moved through the month and into the festive period as a result of the onset of the Omicron COVID-19 variant. Whilst our hotel performance was excellent, the value pub and restaurant sector in which we operate remains more challenging.

Whitbread also says it has seen “resilient trading” in the UK despite the onset of the Omicron COVID-19 variant. Total UK accommodation sales grew 5.1% in the last six weeks, compared to pre-pandemic levels.

But total food and beverage sales are down 17.2% in the six weeks to 6th January, with recent weeks “adversely impacted by the Omicron variant and increased Government restrictions on eating-out in Scotland, Wales and Northern Ireland”, it adds.

Richard Lim, CEO at Retail Economics, says Sainsbury’s benefitted from customers prioritising Christmas get-togethers despite rising anxieties about the virus.

The wave of cancellations that hit hospitality firms last month also helped, as Omicron fears led people to stay (and eat) at home.

Food sales held up well against the previous year (given the restrictions in 2020) as more family gatherings took place and consumers indulged across premium lines.

“To ensure a covid-free Christmas, many people limited their social interactions in the run-up the big day, boosting home-cooked meals to the detriment of the hospitality sector. This displacement of spending from bars, restaurants and pubs supported food sales over the period.

“The retailer was also much better placed to cope with the surge in online grocery sales having invested heavily to boost capacity and improve efficiency over the last couple of years. A wave of new online grocery shoppers helped almost double sales on 2019 levels.”

Sainsbury’s is in a good position to ride out rising inflation, predicts Zoe Gillespie, investment manager at Brewin Dolphin:

“UK supermarkets faced tough comparisons against Christmas 2020, when lockdown caused a boom in food and drink sales, but the spread of the Omicron variant saw consumers stay away from bars and restaurants last year as well. Sainsbury’s is continuing to deliver strong results on the back of the range of measures it took to improve business performance.

Encouragingly, profit guidance has been lifted, cost savings are helping to stave off the effects of increased inflation, and debt reduction is ahead of schedule. Even the supermarket’s banking operation is seeing a turnaround in fortunes. Sainsbury’s is in a good position and that is being reflected in its increased market share and a share price that is up more than 50% since the very beginning of the pandemic – although, it is still off recent peaks.

While the spectre of inflation remains, Sainsbury’s has the ability to manage this better than many other businesses.”

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

The UK’s energy crisis could last for two years, Centrica chief executive Chris O’Shea has warned, in a sign that the cost of living squeeze will intensify.

Speaking to the BBC, O’Shea warned that gas prices won’t fall soon, as consumers brace for bills to jump by around 50% this spring.

O’Shea, whose firm owns British Gas, the UK’s biggest energy supplier, warned that the energy squeeze will not be short-lived, so the government needs to provide targeted help to those who will suffer most.

“The market suggests the high gas prices will be here for the next 18 months to two years.”

There’s no reason to think that energy prices will come down anytime soon.

Wholesale gas price soared last year, hitting record highs towards the end of 2021. Although they have dropped back since, prices are around four times higher than a year ago.

© Provided by The Guardian
The UK day-ahead gas price is around £2 per therm, up from 50p/therm a year ago Photograph: Refinitiv

O’Shea says the high demand for gas was partly being driven by a move away from coal and oil — creating rising demand for gas and a scramble for supplies.

“As we move towards net zero, gas is a big transition fuel.

“And so as you turn off coal-fired power stations in other countries, there isn’t an abundance of gas that you can just turn on quickly.”

But he doesn’t believe boosting supply from the North Sea as a domestic solution would have helped:

“We bring gas in from the United States, from Norway, from Europe, from Qatar, from other places. So we’re not in a position to simply have the UK as an isolated energy market. We are part of a global market.”

Bills are expected to jump by up to £700 in April after Ofgem next reviews the UK’s energy cap, taking the annual cost of electricity and gas for households on a supplier’s default tariff to £2,000, compared with £1,300 at present.

O’Shea says the government can take three steps to help:

• Defer the cost incurred by surviving suppliers from taking on customers of the many companies that have gone bust, rather than it be added to upcoming bills.
• Take the 5% VAT off energy temporarily or permanently.
• Move levies charged to fund a green transition from bills to general taxation.

Those moves, he claims, could be implemented quickly:

“And that would take care of half of the price rise.

And then you could get a further relief targeted to those households that needed most.”

Related: British Gas owner appoints Amber Rudd as a director

Pressure is mounting on the government to act, with Ofgem due to announce the price cap next month.

Last week, Liberal Democrat leader Sir Ed Davey has called for the Warm Home Discount scheme, which helps people receiving some benefits, to be expanded.

Davey argue that the Warm Home Discount should be more than doubled, from £140 to £300, and allow many more people to qualify.

Related: Protecting vulnerable from £700 hike in energy bills means hard choices now | Nils Pratley

O’Shea, though, argues that the current design of the Warm Home Discount scheme would see relief for some result in rises in everyone else’s bills.

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The cost of living squeeze means that UK households have suffered the sharpest fall in the amount of cash they have available to spend for almost eight years, as high inflation and rising energy bills hit households.

According to a report by the insurer Scottish Widows, increasing living costs at the end of last year hit people’s pockets and led to the steepest decline in cash availability since the start of 2014.

It said people were increasingly pessimistic about their future finances in 2022, according to the latest reading from its quarterly household finance index.

Related: UK households suffer biggest fall in available cash in eight years

The agenda

• 10am GMT: Eurozone industrial production for November
• 1.30pm GMT: US CPI inflation for December
• 3.30pm GMT: EIA weekly US oil inventory figures

Centrica chief Chris O’Shea also questioned whether energy producers, who have benefitted from the surge in wholesale prices, should face a windfall tax.

The Labour party have proposed a £1.2bn levy on North Sea oil and gas producers, as part of a package to help households and businesses with soaring bills.

O’Shea argues that the Treasury will already benefit from the jump in earnings:

If their profits are higher, they’ll be paying more tax. That will go into the government coffers. So there will be a tax windfall for this.

And he suggests that change to the tax regime could deter investment:

If your reaction to anything is to suddenly change the tax regime, then the only question I would say is, is that consistent with a long-term stable investment framework.

Is that consistent with a long-term stable solution, because that’s what need to ensure this never happens again.

Related: Labour proposes windfall tax on North Sea oil and gas to reduce bills

Related: Tory rejection of windfall tax on energy firms ‘beggars belief’, says Ed Miliband

Energy producers are certainly benefitting from the jump in energy prices, though.

Last November, BP CEO Bernard Looney said that soaring global commodity prices have made his energy major a “cash machine”, as it lifted its share buyback programme thanks to a sharp rise in quarterly profits.