For the UK, rising inflation means falling sales .....any other good news ? Oh yes ..... Tony Blair

Friday 17th February 2017

For the UK, rising inflation means falling sales .....any other good news ? Oh yes ..... Tony Blair

ref : "UK Retail Sales Unexpectedly Decline as Inflation Bites" , Bloomberg Markets

Yesterday the Currencies analysis in the FT pointed out how volatility levels in the British Pound had fallen to lows for the year. Despite a few momentary swings, the Pound had closed in the relatively narrow range of 1.2450 to 1.2550 against the US Dollar every day in February. Well, we'll probably get a chance to see if that band will hold as soon as tonight. 

Sterling has dipped under 1.2400 this morning after some disappointing retail sales figures led to speculation that the "UK consumer's remarkable post-Brexit resilience" might be running out of steam. An inflation level of 1.8% announced earlier this week may have been marginally lower than forecast but is still ample evidence that the currency's sharp decline inevitably means equally sharp rises in import costs. Importers and retailers cannot be expected to absorb those extra costs on any long-term basis and some analysts are predicting inflation to hit 3.0% this year.

Against that sort of backdrop it's hardly surprising that shoppers are reining back but news that January retail sales dropped 0.3% came as a nasty shock. They had been expected to rise by 1%, and the fall followed a revised decline of 2.1% in December. In the three months to January, sales fell by 0.4%  --  the worst quarterly performance since 2013. If investors had thought there was a fair chance that inflationary concerns might force the Bank of England to raise rates, it now seems reasonable to assume that slowing economic performance might be an even better reason to stay their hand. Expectations of a rate rise in 2017 have dropped from 50% at the start of the year to about 13% now.

Supporters of Brexit will take the view that such short-term difficulties may be regrettable but were always likely to happen and are a price worth paying. Remainers on the other hand will no doubt contend that this is just the start of some kind of economic meltdown brought on by Brexit. Whether they will be buoyed by the re-emergence of Tony Blair as their new cheerleader today is less certain. In most circumstances the call to rise up against a move that 48% of the electorate voted against, by a former PM who won more electoral victories than anyone else in his party's history, would be a pretty serious obstacle to be overcome. But post-Iraq such is the disdain and distrust in which Mr Blair is held by so many, it's possible that his adoption of the leading role in the anti-Brexit campaign will be more of a hindrance than a support for that cause  --  or to put it more strongly, his blessing may prove to be toxic.

For what it's worth, most (but not all) analysts are calling for the Pound to break lower. There's a solid logic to that view, but sterling and the British economy have confounded expectations repeatedly since the Brexit vote, and if political risk is any part of deciding trading strategy, then the UK is hardly the only area facing trouble on that front.