Will real incomes get badly squeezed?
It is now conventional wisdom amongst economic forecasters, pundits and many journalists that 2017 will see substantial price rises thanks to the fall in the pound, leading to a squeeze of real incomes. The recession many of them foresaw for this winter has in their minds just been delayed – and maybe moderated – into 2017 as they await the bad news they confidently forecast.
These gloomsters underestimate several trends. The first is they fail to acknowledge that more of the fall in the pound occurred between June 2015 and April 2016 than has happened since the Brexit vote. They need to tell us why shop prices were still down at the end of 2016 compared to a year earlier, when over a year had already passed from a substantial fall in sterling. The second is they underestimate the very competitive conditions in world goods markets. China and others have been in large oversupply for many months, leading to weak prices for their goods.
The third is they have not caught up with the huge competition in UK retail stemming from big increases in floor space in recent years. The advent of whole new large shopping centres like Westfield in London have intensified the pressure to capture the consumer pounds and forced more price competition on shops. The fourth is the even more intense competition coming from internet retailing. The large retailers themselves are having to cut their own margins and prices on traditional sales in stores just to keep and grow their share of the digital pound.
Some of the prices being offered eighteen months after the pound began its fall and six months after the Brexit vote are very good, providing cheap products well below the prices of mid 2015. Overall last year shop prices fell again. Retail is about endless promotion, with continuous offers, discounts and email communications to long mailing lists of people who have once bought in the past from the retailer in question. Price is central to many of the offers, and retailers are afraid any increases in price will lose them valued market share.
Whilst it is certainly true that the RPI will rise this year, much of this will be due to the oil price and other commodities which have started rising sharply in recent months. The effect from lower sterling is likely to be more muted, as it has proved so far from a currency devaluation that started eighteen months ago. With jobs up, overtime up, bonuses up and wages up I expect real incomes to end 2017 higher than they began despite the rise in petrol and diesel prices.
Source: http://johnredwoodsdiary.com/2017/01/04/will-real-incomes-get-badly-squeezed/
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