Inflation, housing affordability, and peak rates
Making sense of the latest trends in property and economics from around the globe.
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Business activity across the UK private sector contracted for a third consecutive month during October as the impact of higher interest rates continued to feed through.
The results of the latest flash PMI from S&P Global/CIPS shows activity shrinking across both the manufacturing and the services sectors. The decline cited by services providers was only small, but respondents commented on subdued consumer confidence, the impact of elevated borrowing costs, and weak client demand across the real estate sector.
Bank of England policymakers will like aspects of this. Activity has so far slowed in a measured manner that should ease rising prices without prompting a sharp challenge to the economy.
Sentiment is poor, which should keep inflation expectations anchored. Optimism measured by the PMI weakened for the first time since July and was the lowest seen in 2023 to date. Sharp falls in growth expectations were seen across the manufacturing and service sectors. Survey respondents typically cited worries about the UK economic outlook and constraints on spending due to higher borrowing costs.
Mixed signals for inflation
All that said, there were some mixed signals for inflation.
Input price inflation, a measure of the costs respondents pay for necessities like fuels and materials, slowed for the third consecutive month in October and was the lowest since the start of 2021. This was helped by a further softening of cost pressures across the service economy, alongside falling purchasing prices in the manufacturing sector. Where higher business costs were reported, this overwhelmingly reflected rising staff salaries and greater fuel prices.
However, the measure of prices charged by respondents accelerated to a three-month high, "driven by a sharp and accelerated increase in output charges across the service economy, with survey respondents often noting efforts to catch up on broader inflationary pressures and limit the squeeze on their operating margins." That will give the Bank of England pause for thought, particularly in the context of rising oil prices resulting from the conflict in the Middle East, as I covered in Monday's note.
The rise in prices charged by services companies points to "some stickiness of headline inflation around the 4% mark into the early months of next year," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “In this context, any upward inflation pressures due to higher oil prices will be a major concern, meaning it would be unlikely for policymakers to rule out the possibility of rates rising again later in the year.”
Peak interest rates
Despite the mixed signals, the Bank of England is overwhelmingly likely to hold the base rate at 5.25% when it publishes its next decision on November 2nd.
Some 61 of 73 economists in an October poll by Reuters said there would be no move from the Bank next week, in line with market expectations. Returning inflation back to the 2% target is likely to be a protracted process. Economists expect inflation to average 3% next year before returning to target in Q2 2025. The majority don't expect the first rate cut to arrive until at least July. A third expect the Bank to act earlier.
The European Central Bank is also likely to opt for a pause when it publishes its decision tomorrow. The PMI indicators published yesterday revealed a sharp contraction in business activity. Private sector output declined at the steepest rate for over a decade if you exclude the worst months of the pandemic. Housing market activity is now slowing markedly across most countries in the eurozone.
UK housing Affordability
The ONS yesterday published a raft of stats illustrating how unaffordable or otherwise housing is in the UK.
Predictably, it's mostly bad news, though renting is still regarded as affordable across England but not in London. The ONS defines a property as affordable if a household would spend the equivalent of 30% or less of their income on rent. Private renters on the median household income in England can expect to spend 26% of their income on rent. In London that figure rises to 35%.
The prospects for buyers remain fairly bleak. A home is considered broadly affordable if it costs five years of income or less. The average home in England costs 8.4 years of income for the average earner.
Just over 4 in 10 adults in Great Britain paying rent or a mortgage say they are now finding the payments very or somewhat difficult to afford. That has increased from 30% during a similar period last year. Among rent and mortgage payers, 40% said their payments had increased in the last six months. That's up from 33% a year ago.
In other news
Also from Knight Frank - Andrew Shirley adds a rural perspective to the government's net zero conundrum, Will Matthews on the UK's election odds in the wake of Labour's recent gains, and you can now read the full version of our report on the economic impact of Crossrail.
Elsewhere - Britain’s net zero shift is being held back by implausible renewables, Centrica warns (Telegraph), investors seek niche property assets in hunt for better returns (FT), and finally, the last time US yields rose so much, it sank the economy twice (Bloomberg).