Life looks grim for the British consumer.
On the one hand, prices are rising. On the other, so is unemployment, so there’s little chance of wages rising to match.
High inflation and lengthening dole queues add up to one thing: misery. Britain’s Misery Index – which adds the inflation rate to the unemployment rate – is now at a 19-year high. And it only looks set to rise further.
Depressing, yes – but what does it mean for your portfolio?
Nearly a third of the UK workforce is out of work
The Misery Index was created by US economist Arthur Okun in the 1960s. It’s pretty self-explanatory: rising inflation and rising unemployment are both bad news for an economy. So add them together and you get a good rough and ready indicator of how much trouble a country’s in.
Last week, we learned that the unemployment rate rose to 8.1% in August, the highest level since 1994. That’s 2.57m people who are officially jobless. On top of that, a staggering 9.35 million are classed as ‘economically inactive’. As the Office for National Statistics puts it, they “have not been seeking work and/or they are unable to start work”.
Sure, the ‘economically inactive’ stats take in the likes of students. But if you add it all up, it means that almost a third of Britain’s workforce isn’t adding any GDP. And with the economy grinding to a halt, the number of non-producers is only rising.
This is a problem. It means that the country’s tax burden will fall on fewer shoulders (because fewer people are earning), while at the same time benefit payments will rise.
In other words, the government will be raking in less tax, yet having to pay out more. Given that we’re already deep in debt, that means there will be more pressure on the government to raise taxes to bolster revenues.
And of course, if you don’t have a job, you generally won’t have a lot of spare cash to splash around. So rising unemployment will hit consumer spending, which still accounts for around two-thirds of Britain’s economic activity.
How inflation is squeezing the life out of the economy
What about the inflation side of the Misery Index? The consumer price index (CPI) is now rising at 5.2% a year, a three-year high. The retail prices index (RPI), which includes housing costs, is at a 20-year high of 5.6% (for all the gory details, check out our inflation indicators).
The latest surge has been largely pinned on rising energy prices. That’s another problem for Britain’s consumers. The more money they have to shell out on essentials like fuel, the less they have to spend on anything else, which will hit consumer-related businesses even harder.
But there are other unpleasant side effects. For example, as The Telegraph reported yesterday, corporate Britain now faces the biggest jump in business rates for more than 20 years. That’s because the government uses the September RPI figure to set next April’s rates rises. For retailers – in fact for commercial property tenants everywhere – that will be very unwelcome.
This is all bad news for a whole range of consumer-facing businesses, from holiday companies to high street chains. Just look at yesterday’s results from Home Retail, the owner of Homebase and Argos. Sales at Argos fell sharply, while half-year profits plunged from £54m to £3.4m. That’s the lowest ever recorded in a six-month period. And what’s really scary is that Home Retail boss Terry Duddy reckons his firm is doing better than its rivals.
For investors, the message is clear. It’s been our advice for a while, but we’ve no reason to change it: steer clear of consumer-related shares.
The Misery Index hasn’t peaked yet
Are things likely to improve? The Bank of England says that inflation is set to fall. But the Bank has been woefully behind the curve for ages – its forecasting skills have been pitiful, to put it bluntly. Indeed, the Bank is part of the problem.
As John Stepek noted at the end of September, pumping more money into the system via another round of quantitative easing (QE) “would be a disaster for Britain”. That’s because it could stoke up even more future inflation.
What did the Bank do, just a week later? Introduce QEII. You can keep track of the damage by monitoring our inflation indicators page. But the future isn’t looking bright.
By now you’re probably getting the picture. The Misery Index may already have hit a 19-year high, but it still looks set to rise further. And for investors, that’s generally a pretty bleak prospect.
But there may be something you can do to boost your portfolio. Last time I wrote about the Misery Index: A share to cheer you – despite the Misery Index, I tipped high-yielding life insurer Resolution (LSE: RSL) as a way of getting an inflation-busting return. Since then it’s provided a total return of 10%, but on a 7% prospective dividend yield, the stock is still worth buying.
And last week, I suggested another way of cashing in on Britain’s rising cost of living. You can read about it here: These companies are hated – so you should keep buying them.
Category: Economics