UK consumer spending suggests rate increase

Strap yourselves in for a bumpy ride this winter. It seems that the surprise rate increase by the Bank of England earlier this month hasn’t been enough to hold consumer spending or an increase in house prices in the UK. What’s the Bank of England to do?

According to the CBI today, retail sales in August grew at their fastest pace in 18 months. In its quarterly distributive trades survey, the CBI found that more retailers said sales were higher than lower – a positive balance of 12 percent. This is the highest Since December 2004, when the balance was 33 percent more positive.

Money markets sent sterling higher as analysts predicted the new figures would increase the likelihood of further interest rate increases from the Bank of England in order to slow the growth of inflation suggested in the report.

It seems that grocers and brown goods stores were the main beneficiaries of the growth – with sales of high ticket items such as Flat Screen Televisions leading the way.

Much of this could be put down to increases in borrowing as house prices have defied predictions and continued to increase over the summer holiday period.

Households borrowed $10.9bn net in July, up from £9.8bn in June. Mortgage lending increased from £9bn in June to £9.8bn in July – the highest level for 3 years. This included both new and ‘re-mortgaging’.

All of this is quite bad news for the Bank of England, which is chartered to keep inflation at 2 percent.

Worse still, it seems that British consumers are getting the ‘Australian bug’ and spending like there’s no tomorrow. With the long run of house price increases over the past few years, and a market awash with money, it seems that the consumer has got into the habit of spending the gains from the property market. Lenders have obliged as the assets consumers own have increased in value – therefore lowering lending risk – however, this has led to high levels of exposure to debt and a real risk that asset values may at some point collapse.

If the government and the Bank of England are going to slow growth and the risks of inflation then it may be time to remind the consumer that spending has got out of control. The Bank of England needs to reign in spending over the next few months – we may see the return of the ‘short sharp shock’ treatment of the old days. Certainly, runaway house prices and spending are not good for the economy in the long term.

Interest rates are surely on the way up – we suggest by more than the expected 25 points.