Inflation is falling but do marketers have cause for optimism?
Inflation in the UK fell to 8.7% in April, but this is unlikely to translate to confident consumers or companies just yet.
Last week, the consumer prices index (CPI) announced inflation in the UK fell to 8.7% in April, down from 10.1% in March. On the surface, this seems like good news. In reality, budgets are still likely to be tight for both consumers and businesses for some time yet.
There are two key reasons behind this. Firstly, the drop in inflation is not as steep as expected. The Bank of England had predicted it would fall to 8.2%. Prime Minister Rishi Sunak has promised to bring it down to 5% before the end of the year.
Secondly, the cost of food is rising faster than other essentials. Inflation on staple household items, including sugar, milk and pasta, continued to increase at near record rates last month. The rate of inflation on groceries overall was at 19.1% in April. Chancellor Jeremy Hunt said that these rates are “worryingly high”.
“Overall inflation appears to have peaked but the reality is that there’s still more pain to come,” Richard Lim, CEO at research consultancy Retail Economics, explained. “Food inflation is particularly challenging as it is one of the most transparent indicators of living costs and often a catalyst to cut back spending elsewhere.”
Another concern for UK businesses is whether the Bank of England will now increase the base rate of interest in June, making borrowing more expensive.
Raj Badiani, principle economist at S&P Global Market Intelligence, told Marketing Week: “Rising service and core inflation in April suggests the Bank of England has little option but to continue its current tightening cycle. We now expect the policy rate to rise by 25 basis points to 4.75% at its next meeting on 22 June while acknowledging the rising probability of a further hike in early August.”
Interest rates increased earlier this year from 4.25% to 4.5%, making borrowing more expensive for both businesses and consumers. However, Badiani did say that inflation is expected to fall steadily from mid-2023 onward, which should allow for interest rates to fall from early 2024 onward, predicting a fall to 2.5% by mid-2025.
Brittle consumer confidence
Joe Staton, client strategy director at market research company GfK said: “You don’t need to dig deep into the headlines to see that many persistent pressures remain. Despite falling energy costs at home and at the pump, rapidly rising prices for food and servicing mortgage and rent costs don’t mean consumers are better off as expenditure outstrips any income growth.”
After more than a year of this trend, it should be of concern that consumers are likely to still be working with tight budgets, but Staton is optimistic about the potential response. “UK consumers are increasingly confident when it comes to the state of their personal finances with a strong uptick in expectations for the next 12 months, an important indicator of our willingness to spend which drives the wheels economic wheels of the country,” he explained.
You don’t need to dig deep into the headlines to see that many persistent pressures remain.
Joe Staton, GfK
The latest GfK Consumer Confidence Barometer, published earlier this month, shows a three-point uptick in consumer confidence, to -27 – the best overall score since February 2022 when the score was -26.
Despite this week’s setback, inflation is still expected to slow later this year, bringing interest rates down with it in early 2024. Staton also reiterated that inflation is falling – even if by not as much as hoped – is still good news, which tends to get a positive response from consumers. “We anticipate the financial mood of the nation will be sunnier for the remainder of 2023,” he said.
IPA’s Bellwether Report, published last month and considered to be a reliable barometer of intended marketing spend, suggests that companies are also starting to feel more positive. The number of panel members reporting feeling optimistic, compared about their company’s financial position was up by +0.7%, compared to -17.2% in the previous quarter This was the highest level of confidence reported by the panel since the fourth quarter of 2021.
That said, at an industry-wide level confidence is still low. A net balance of -7.1% panel members said they were more pessimistic about the prospects for their sector category than three months ago.
Meanwhile, UK ad spend is expected to grow by just 0.5% in 2023, according to the latest AA/WARC forecast.
Despite better news this week, the approach among companies and marketers is likely to remain cautious.