You may have read in my previous articles how I see the wealth confiscation taking place
affecting consumers and consumer expectations. Simply put, if goods and services become
too expensive relative to consumer income then the consumer will capitulate and conserve
what little spending power remains for essentials. In other words, you can put any price
you want onto an asset but it doesn’t mean you will sell it.

Today saw the release of 2 sets of figures, the ONS Output or Factory Gate prices and the
BRC consumer confidence figures. Both made poor reading as individual events but when
combined they spell the deathknell for the UK consumer.

• ONS Output Prices:

  “The cost of goods leaving Britain’s factories is increasing at the fastest rate on record
  as companies struggle to cope with fuel and raw materials bills up almost 30% on a year ago,
  the government said today.Releasing data that further dampened hopes of an early cut in
  interest rates to revive the flagging economy, the Office for National Statistics said
  factory gate inflation hit 8.9% – the fastest since comparable records began in 1986. The ONS
  said output prices rose by 1.6% in May, with the core rate – excluding food, drink, alcohol
  and tobacco – up by 1.2% – three times as fast as the City had been predicting. Although
  comparisons with previous eras of inflation have been complicated by changes to the way
  producer prices are calculated, the ONS said industry’s energy bills appeared to be rising
  more rapidly than at any time since the mid 1970s, when the first post-war oil shock sent
  consumer inflation in Britain to 27%.” (Guardian)

• BRC Consumer Confidence:

  “One in five people surveyed by the BRC and market research group Nielsen said that they have
  no spare cash, and are cutting back on even non-essential spending. In a blow for Britain’s
  retailers, the BRC found that clothes, footwear, furniture and new technology are the high
  street’s biggest casualties as consumers attempt to rein in their spending.”

  “Britain’s economy was the most ‘major concern’ for 31pc of those surveyed, followed by
  personal debt with 26pc. Other top worries included work/life balance at 20pc and immigration
  at 16pc.The Nielsen/BRC consumer confidence index now stands at 79 – the lowest score recorded
  since records began in 2003 – down from 91 last year.” (Telegraph)

Inflation, that condition that results when too much cash/credit chases too few assets is the
major concern throughout the economy today. Yet it is not what you should be preparing for now.
Those that prepared for inflation 3-5 years ago are now reaping the reward as inflation sets the
economists their agenda.

Now is not the time to worry about inflation. Its time now to realise what the outcome will be
as consumers, without excess cash/credit, loaded with obligations that are burdensome to service
and lacking the pricing power to ask for higher wages, will do next.

Firstly consumers stop spending on all but essentials and servicing debt. For many consumers its
already too late, their income is already less than their outgoings and this group will grow over
the summer. You will start to see higher rates of default on unsecured debt, a rise in IVA filings and
a new daytime programme to replace “Homes under the hammer”, probably based on Collection Agencies.

Watch for a rise in insurance claims, abandoned or returned to dealer vehicles and rising “for sale”
signs on properties. As the recession bites down hard, look for wholesale abandonment of all assets
that are purchased using credit, secured or unsecured. Expect a rise in racial violence, especially
against EU workers in low paid work. Industrial relations tensions will also rise. We may face an
“Autumn of Discontent”.

Pricing power on all non-essentials will collapse, whilst pricing for essentials will be governed by
a consumer that is watching every pound. Competition for sales amoungst retailers, service providers
and any other non essential business will become fierce, driving prices down whilst production is
slowed to match demand. Credit standards will tighten considerably. Unemployment and business bankruptcy
will rise creating futher deflationary pressures as the demand for assets collapses.

Still worried about inflation?

Without liquidity and demand for assets, inflation disappears quicker than Gordon Browns election
prospects. If you want to worry, check out your savings, make sure you have plenty of cash at hand.

Not so pretty?

Then start to get organised, just like those who saw a bout of inflation coming did a few years ago.

Commentary by Mick Phoenix

on behalf of CA Letters

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.