Brits ‘need to accept’ they’re worse off and stop pushing wages and prices higher, says BoE chief economist – as it happened

Time for a recap.

The chief economist of the Bank of England has declared that businesses and households should “accept that they’re worse off” due to the surge in energy prices.

Huw Pill told an economics podcast that a ‘pass the parcel’ game, in which people try to pass on the impact of inflation by seeking wage increases or lifting their prices, was driving the cost of living higher.

As Pill put it:

So somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing the energy costs through onto customers.

And what we’re facing now is that reluctance to accept that, yes, we’re all worse off, and we all have to take our share.

More here:

Several of the world’s best-known consumer goods firms have revealed how price increases have boosted their sales this year.

Nestlé, the Nespresso and Kit Kat maker, lifted its prices by 9.8% in the first quarter of this year, close to the fastest pace in more than three decades. It suffered little sales damage, with volumes down just 0.5% as consumer stumped up more for Nestlé’s food, drink and petfood.

McDonald’s benefitted from a price hike on its menus – such as pricier cheeseburgers – it reported that sales are up 12.6% compared with a year ago

And Pepsico, the drinks, food and snacks group, hiked its prices by 16%, which only pushed down its sales volumes by 2%.

These prices increases are hitting households. Data firm Kantar reports that grocery prices have risen by 17.3% over the last 12 months, a slight slowdown.

Fraser McKevitt, the head of retail and consumer insight at Kantar, warned it was “too early” to say grocery inflation had peaked.

“We’ve been here before when the rate fell at the end of 2022, only for it to rise again over the first quarter of this year.”

Bank of England deputy governor Ben Broadbent argued today that the Bank’s quantitative easing stimulus programme was not to blame for fuelling inflation, by boosting the money supply. Instead, he said, supply chain disruption and high energy prices were responsible.

Broadbent also predicted that inflation could be turning lower.

Here are the rest of today’s main stories:

Huw Pill’s comments are causing a stir:

Huw Pill’s claim that workers should not push for pay rises to protect themselves from rising prices “puts the BoE in conflict with thousands of public sector workers angry at the government over its decision to restrain pay,” Bloomberg says.

Huw Pill, the Bank of England’s chief economist, has declared that citizens and businesses “need to accept” they are poorer, and stop pushing prices higher and seeking pay increases.

Pill says a game of ‘pass the parcel’ is taking place in the economy – as households and companies try to pass on their higher costs.

Speaking to “Beyond Unprecedented: The Post-Pandemic Economy”, a podcast produced by Columbia Law School, Pill explains that it’s natural for a household to seek higher wages in response to soaring energy bills, or for a restaurant to increase its prices.

But in the end, he says, the UK is a big importer of natural gas, and its price has gone up a lot compared to the services which the UK sells to the rest of the world.

“If the cost of what you’re buying has gone up compared to what you’re selling, you’re going to be worse off,” Pill says.

He adds:

“So somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing the energy costs through onto customers.

And what we’re facing now is that reluctance to accept that, yes, we’re all worse off, and we all have to take our share.

[Instead, people] try and pass that cost on to one of our compatriots, and saying ‘we’ll be alright, but they will have to take our share too’.”

“That pass the parcel game that’s going on here….that game is generating inflation, and that part of inflation can persist.”

Pill’s comments come on a day in which Nestlé, Pepsico and McDonald’s have all reported that higher prices boosted their sales this year, and as families face 17.3% grocery inflation in supermarkets.

But he also risks adding to criticism that the Bank is ‘tin-eared’ over the cost of living crisis, with households facing the worst fall in living standards in decades.

During the podcast, Pill explains that the real goal of central bankers is price stability, to keep inflation at a level doesn’t influence people’s life decisions. The Bank’s target is to keep inflation at 2% in the medium term – but it has been running over 10% for several months.

Central banks are very focused on the persistent components of inflation, Pill explained, outlining it takes around 18 months for interest rate changes to affect the economy.

Pill says:

Inflation has been higher than we expected for longer, for an undesirably long time.

He explains that a series of shocks that have all pushed inflation in the same direction, meaning price pressures have not dissipated.

First, the Covid-19 pandemic disrupted supply in the economy, just as the US government were handing out stimulus cheques to citizens in the lockdown.

Just as the pandemic inflation shock was easing, Russia turned off gas supplies to Europe, driving up wholesale energy prices by over 1,000%.

“That had a massive contribution to inflation,” Pill says, and while gas prices have fallen recently from their Ukraine war highs, food price inflation is now acccelerating.

U.S. Treasury Secretary Janet Yellen is warning of an “economic catastrophe” if Congress fails to raise the US government’s debt ceiling, leading the country to default on its borrowings.

Yellen, in remarks prepared for a Washington event with business executives from California, said a default on US debt would result in job losses, while driving household payments on mortgages, auto loans and credit cards higher.

She said it was a “basic responsibility” of Congress to increase or suspend the $31.4trn borrowing cap, warning that a default would threaten the economic progress that the United States has made since the COVID-19 pandemic.

Yellen told Sacramento Metropolitan Chamber of Commerce members that:

“A default on our debt would produce an economic and financial catastrophe.

“A default would raise the cost of borrowing into perpetuity. Future investments would become substantially more costly.”

With the calendar inching closer to June, when a default could occur, the path forward on raising the debt ceiling remains deeply unclear.

Despite pressure, Congress has yet to reach a deal to lift the limit on borrowing, as my colleague Joan E Greve reports:

The Republican House speaker, Kevin McCarthy, has attempted to kickstart talks with the White House on Wednesday by outlining his proposal to raise the debt ceiling in exchange for government spending cuts that would curtail implementation of Joe Biden’s landmark climate and healthcare legislation.

But that proposal may not be able to pass the House, given Republicans’ narrow majority. Even if the bill does make it through the House, the proposal has already been rejected by Joe Biden and Chuck Schumer, the Democratic Senate majority leader.

The Duke of Westminster’s property company, which owns swathes of London’s exclusive Mayfair and Belgravia districts, has paid out a £50m dividend despite falling profits.

The boss of Grosvenor, the duke’s £11.5bn property empire, warned of a period of stagflation and that UK interest rates and inflation could stay high for longer than expected, resulting in “more pain” for the commercial property market.

Mark Preston, the chief executive, predicted a “shakeout” in real estate, as the value of its offices and other commercial assets in the UK dropped by 3.7% year on year amid a downturn in the market, after 2.5% growth in 2021.

Even so, it paid a £49.9m dividend to the duke’s family and its trusts, after a £48.7m dividend in 2021. Grosvenor also owns rural estates and one of the largest farms in the UK, as well as investments in food and agritech firms.

News of the dividend comes as the Duke of Westminster, Hugh Grosvenor, turns his mind to his wedding.

Grosvenor, who is close friends with Prince William and godfather to Prince George, has announced his engagement to his girlfriend, Olivia Henson, who works for the London-based ethical food company Belazu.

Grosvenor, 32, owns more than 300 acres of some of London’s fanciest properties in Mayfair and Belgravia as part of a global, family-owned property empire valued at £9.5bn, making him the third richest person in the UK.

No wonder his father once famously described himm as being “born with the longest silver spoon anyone can have”….

Bloomberg’s Joe Weisenthal has tweeted the key chart showing how price rises, not sales volume growth, lifted Pepsico’s revenues:

Many companies have taken advantage of the return of inflation to inflate their prices excessively, warns Charles-Henry Monchau, chief investment officer at Bank Syz, the Swiss boutique bank.

These price rises risk stimulating an inflationary spiral, Monchau warns in a research note titled “Welcome to greedflation”.

Monchau says:

The energy and food sectors made staggering profits in 2022. 95 companies made $306bn in windfall profits. But what is most striking are the profit margins. Some argue that the windfall profits are simply the product of companies passing on rising costs to consumers.

However, the increase in margins suggests that companies are taking advantage of the crisis to increase their profits. In other words, there is more inflation observed on the top line than on costs. A study by Equals found that 76% of companies increased their net profit margins in 2022. In the energy sector, 71% of companies increased their profit margins. According to the same study, 85% of food companies increased their margins.

Some subsectors saw particularly notable profit increases: synthetic fertilizer manufacturers increased their profits by an average of 10 times, meat companies by five times, while agricultural equipment and raw material traders increased their profits by almost two times.

Not surprisingly, Monchau adds, some of these industries are in the crosshairs of regulators:

The US meat industry has been targeted by the Biden administration’s plans to boost competition in the industry.

25 Apr 202308.49 EDT

Julia Kollewe

Associated British Foods, the firm behind Primark, says that most of its price rises are now in place.

Faced with surging energy and freight costs, ABF chief executive George Weston, said the company had raised its prices in the single digits, but “by less than costs, and less than others”, which meant profits suffered. Primark made a first-half operating profit of £351m, down by 15% from a year earlier. Childrenswear prices have been unchanged.

“The need for further price rises has reduced significantly just over the past few months,” he said.

Weston added:

“We’re quite confident that most of the price rises that consumers were going to see they’ve already seen. And then I hope we can get back to the world we were in for 10 years where we move prices down, not up.”

The firm said sea freight costs had returned to normal levels, and energy prices had also fallen, although the strength of the US dollar against sterling and the euro is driving up the cost of bought-in goods. Operating costs excluding exceptional items went up by 24% in the first half across the ABF group.

More here:

Kimberly-Clark, the US personal care products maker, has grown its sales on the back of higher prices.

The firm behind Andrex, Huggies and Kleenex has reported it raised prices by 10% in the first quarter of this year. This lifted organic sales by 5%, with sales volumes dropping 5%.

Kimberly-Clark chairman and CEO Mike Hsu says the “essential nature of our products” helped to lift sales.

“Our growth strategy continues to deliver behind strong execution of our commercial programs. Revenue growth management initiatives drove continued sales momentum with a better-than-expected elasticity impact on volume. Looking ahead, we have an exciting innovation pipeline that will deliver superior performance in health, wellness and sustainability.

Despite rising costs, Kimberly-Clark increased its profit margins.

Hsu says:

“While inflationary pressures have yet to subside, we drove continued improvement in our gross margin this quarter.

Here’s former global consumer fund manager Rahul Sharma on today’s results from Pepsico and Nestlé: