UK inflation rises to 0.7% in January; US retail sales jump – as it happened

Orders for almost 100,000 trees have been cancelled by Northern Ireland buyers because of a post-Brexit ban on the plants being moved from Britain, the Guardian can reveal.

Leaders in the business say it is a major setback for tree-planting programmes in Belfast and elsewhere in the region.

The Woodland Trust in Northern Ireland has just cancelled an order for 22,000 trees, which were destined for schools and communities as part of a Northern Ireland greening project.

“It’s a disaster. They’re just stopping any exports from mainland UK over to Northern Ireland. We can’t get any trees over from any of the nurseries that would usually deal with over there,” said Gregor Fulton, an estate and outreach manager at the trust.

Inflation jitters are pushing Wall Street down at the start of trading, away from its recent record highs.

The Dow Jones industrial average has fallen by 79 points, or 0.25%, to 31,443.

The broader S&P 500 index has dropped by 20 points, or 0.5%, to 3,912.

The tech-focused Nasdaq is down 0.9%, shedding 126 points to 13,920.

The jump in US retail sales, the rise in the oil price, and the rise in prices in the UK last month all add to concerns that inflation could pick up this year -- potentially forcing central bankers to consider tightening policy

Joshua Mahony, senior market analyst at IG, explains:

Rising bond yields provide less reason to hold stocks and precious metals, with the US dollar gaining traction as a result.

Optimists will recognise that the Fed’s recent average inflation targeting policy allows for significant overshoot on the inflation-front, yet we are yet to see other banks follow suit thus far.

While the economic recovery does provide grounds for optimism over exactly where we go from here, much of that relies on a widespread accommodative stance on the monetary and fiscal front. Thus, today does provide a warning sign of the importance inflation will play going forward through this recovery.”

In another beat - US industrial output jumped by 0.9% in January, ahead of forecasts of 0.5% rise.

Neil Birrell, chief investment officer at Premier Miton, reckons the surge in US retail spending will make it harder for Joe Biden to persuade Congress to back another large stimulus package:

“Recent retail sales and jobs data has been uninspiring with consumer sentiment under pressure but today’s retail sales number, which is a key data point this week, was way, way ahead of expectations. It will add fuel to the reflation trade.

It is also bad news for Biden, it is likely to make it more difficult for him to get his support package through.”

Inflation is also rising in Canada, faster than in the UK.

Canada’s annual inflation rate accelerated to 1.0% in January, up from 0.7% in December, led by higher prices for durable goods and gasoline.

The US retail sales report also highlights that online shopping, and spending on hobbies, has surged over the last year.

Spending at nonstore retailers in January 2021 was 28.7% higher than a year ago, while sporting goods, hobby, musical instrument, and book stores were up 22.5% year-on-year.

Marwan Forzley, CEO of payments platform Veem, points out that the pandemic continued to drive shoppers online:

After months of decline, it’s encouraging to see an uptick in sales to kick off 2021. Heavy discounting and January promos have likely impacted sales, especially for savvy buyers looking to bag a bargain.

Online storefronts came out on top again this month as more consumers transition to online shopping due to convenience and safety during the ongoing pandemic. If the last 10 months have highlighted anything in the retail industry, it’s the importance of offering an omnichannel experience. Gone are the days where retailers can rely solely on brick and mortar stores for revenue.

The surge in US retail sales shows that stimulus checks do lead to higher spending.

Diane Swonk, chief economist at Grant Thornton, says those $600 payments from Congress had a clear impact:

Neil Saunders, managing director of GlobalData Retail, agrees:

Robert Frick, corporate economist at Navy Federal, reckons that half the stimulus checks were promptly spent in the shops and online:

While oil rallies, precious metals prices are dipping as the US dollar strengthens.

The rise in US government bond yields overnight, amid speculation about rising inflation, is giving the dollar a lift. It could lead to central banks dialling back their huge stimulus packages earlier than expected.

Arne Petimezas, analysts at AFS in Amsterdam,

“Regarding the bond market sell-off, things are finally starting to get serious as real yields are on the rise, driven by bets.. of central banks tightening sooner than previously expected.

Risk assets are now becoming vulnerable to a pull-back.”

Gold, for example, dropped to its lowest level since the start of December today.

The jump in the oil price is being driven by major disruption caused by the winter storm in Southern US states such as Texas.

Some refineries and oil wells have been forced to temporarily shut down due to the snow and ice, which has killed at least 21 people and left millions of homes stranded without power.

Here’s a chart showing how inflation in the UK has hit a three-month high, but remains low in historic terms (but may rise in the coming months....)

Oil has hit a new 13-month high, which could also push inflation up if it feeds through to fuel prices.

Brent crude is up 1.6% at $64.47 per barrel, the highest since January 2020. It’s now rallied by more than 60% since the start of November (when it was trading below $40), as Covid-19 vaccines lifting hopes of a rebound in oil demand this year.

Over in the US, the number of new house loan applications has fallen as mortgage rates rise - another sign of inflationary pressures.

Total new mortgage applications were down 5% last week, compared to the previous seven days, with rising rates deterring potential buyers.

Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association, explains:

“Expectations of faster economic growth and inflation continue to push Treasury yields and mortgage rates higher.

Since hitting a survey low in December, the 30-year fixed rate has slowly risen, and last week climbed to its highest level since November 2020.”

Having hit $50,000 for the first time yesterday, bitcoin is continuing to rally to new peaks.

It’s now trading around $51,500, up another 6% today.

Gold, meanwhile, has dipped around 0.35% to $1,787 per ounce - showing that bullion isn’t really benefitting from worries about rising inflation.

Fawad Razaqzada, analyst at Think Market, says the ‘reflation trade’ is giving bitcoin a boost:

Gold and Bitcoin continue to head in the opposite direction. The cryptocurrency broke above the $50,000 hurdle for the first time ever on Tuesday and is continuing to push to new uncharted territories at the start of today’s session, hitting a high so far of $51,500. In contrast, gold is now looking quite bleak after breaking the $1800 support as investors keep a close eye on government bonds after the 10-year US yield climbed above the March 2020 high the day before.

Bond prices have slumped in recent weeks with investors piling into the more risk-sensitive assets like stocks, Bitcoin, crude oil and copper amid speculation that the ongoing COVID vaccine rollout, slowing virus outbreaks and ongoing central bank and government stimulus will all help to stimulate a sharp global economic recovery. In other words, the “reflation” trade has been kind to cryptos, but not much for safe-haven gold.

In other news... budget airline Ryanair has failed to persuade a top European court that government help handed to French and Swedish airlines during the pandemic broke state aid rules.

The Luxembourg-based General Court ruled this morning that the support given to Air France and SAS were not discriminatory, saying:

“That aid scheme is appropriate for making good the economic damage caused by the COVID-19 pandemic and does not constitute discrimination,”

Ryanair had argued that help for individual airlines, or national schemes that benefited local flag carriers, were unfair and incompatible with the single market.

In a statement following today’s rulings, Ryanair said it will now refer the matters to the Court of Justice of the EU. More here.

The Bank of England is unlikely to be alarmed by the pick-up in inflation, our economics editor Larry Elliott explains:

It would come as no surprise to see inflation rise further over the summer. Many consumers are cash-rich after being deprived of spending opportunities, and a lot of businesses are clinging on by their fingertips. The combination of the two is likely to push up prices. Brexit will continue to have a temporary upward effect on inflation.

Rising prices would only prompt a marked change in policy from the Bank of England if there were signs that it was leading to a surge in wage inflation. That doesn’t seem all that probable, given the sharp rise in unemployment over the past year. But the Bank will start to think about how and when to unwind some of the emergency stimulus it has been providing. Negative interest rates will be off the agenda.

Here’s our news story about Rio Tinto‘s record dividend, after it benefited from demand for iron ore as China’s economy bounced back from the coronavirus lockdown last year.

European stock markets are all down this morning, as the recent rally takes a breather.

The Europe-wide Stoxx 600 has dipped by 0.5%, after global stocks fell slightly yesterday - after an 11-day run of gains (the best in three years).

AJ Bell investment director Russ Mould says:

The FTSE 100 started Wednesday modestly on the back foot after UK inflation figures from which it was difficult to take anything tangible.

“With consumption artificially depressed by lockdown there’s not a lot for the data crunchers to work with, though there are some signs that the widely anticipated increase in prices is starting to come through.

“And a surge in US Treasury yields overnight shows inflation is dominating investors’ thoughts as they look for a higher rate for holding ‘safe’ assets like government bonds.

In the City, the FTSE 100 index of blue-chip shares has dropped by 0.3% in early trading, with inflation on traders’ minds.

Financial services firm Hargreaves Lansdown is the top faller, down 6.6%, after c0-founder Peter Hargreaves cashed in £300m of shares yesterday.

Mining stocks are rising, though, with Rio Tinto up 3.7% after it reported a 21% jump in underlying earning last year - and a record dividend for shareholders.

Rio, like other miners, has benefitted from a surge in commodity prices, particularly iron ore -- something that could feed into inflation.

That pursuit of iron ore led Rio to destroy a sacred site in Juukan Gorge, Western Australia. That site showed signs of continual human occupation over the last 46,000 years, and contained rare artefacts and sacred objects including a 4,000-year-old length of plaited human hair.

Several senior executives, including then-CEO Jean-Sébastien Jacques, resigned after protests over the decision.

Rio Tinto chief executive Jakob Stausholm said today:

“It has been an extraordinary year - our successful response to the COVID-19 pandemic and strong safety performance were overshadowed by the tragic events at the Juukan Gorge, which should never have happened.

UK manufacturers put their prices up last month, according to the ONS’s latest survey of producer price inflation.

Factory gate prices rose by 0.4% in January, up from 0.2% in December 2020 -- but they were still 0.2% lower than a year ago.

Factory bosses also reported that their import costs rose, with the price for materials and fuels used in the manufacturing process up by 1.3% on the year to January 2021, up from positive growth of 0.6% in December 2020.

Clothing and footwear prices fell by 4.8% last month, a steep decline, amid a flurry of discounting.

The ONS says there was “a notable increase in the proportion of items marked as being discounted, particularly for men’s clothing”.

Here’s ONS statistician Jonathan Athow on the inflation stats:

Jai Malhi, Global Market Strategist at J.P. Morgan Asset Management, also predicts inflation will continue to rise in 2021:

The base effects on energy and food prices will push inflation higher in the coming months and the vaccine rollout should eventually lead to a relaxation in restrictions at a time when the government’s VAT cut for the hospitality sector should expire.

“A mix of supply distortions from Brexit and Covid-19, alongside a strong demand recovery, could create a recipe for higher prices across both the goods and services sectors. Inflation is likely to start testing the Bank of England’s 2% target later in the year when the UK consumer is able to unleash some of the £125bn of additional savings they’ve accumulated during lockdowns, particularly if they run into supply bottlenecks.”

Paul Dales, chief UK Economist at Capital Economics, predicts that UK inflation could hit 2% by April (which is the Bank of England’s target).

He also warns that Brexit, and the rise in global shipping costs amid the pandemic, will have an upward impact on prices this year:

The rise in January is a bit of a sideshow to the probable leap in inflation to around 2.0% in April due to last year’s plunge in fuel prices dropping out of the annual comparison, the temporary hospitality VAT cut being reversed and the 9.2% rise in Ofgem’s utility price cap. The unwinding of the downward effects of last August’s EOHO restaurant scheme will push it higher still in August. By December, CPI inflation may be around 2.5%.

We still think that a fall back in oil prices, the effects of the stronger pound and the legacy of spare capacity will drag inflation back below 2% in 2022. But the risk is that the recent spike in global shipping costs, the effect of Brexit and a desire to recoup lost revenues once businesses reopen keep it above 2.0% for longer. Even in that case, over the next few years we suspect the Bank would still prioritise supporting growth over reducing inflation.

Suren Thiru, head of economics at the British Chambers of Commerce, predicts that inflation will continue to rise.

“Post-Brexit border disruption”, and rising demand as Covid-19 restrictions are eased, will both push up prices, he explains, along with a looming energy price hike in April.

Meat prices also rose in January, partly driven by “prepacked, sliced cooked ham and frozen imported lamb leg”.

Food and non-alcoholic beverages rose by 0.6% in January, the ONS says, with vegetables and oils and fats pushed up inflation last month.

Today’s inflation report explains that:

Overall prices for vegetables, in particular for premium potato crisps and cauliflowers (which were heavily discounted in December 2020), rose between December 2020 and January 2021, while they were unchanged between December 2019 and January 2020.

With oils and fats, prices overall fell by 8.9% between December 2019 and January 2020 but fell by only 0.2% between December 2020 and January 2021.

[are crisps really vegetables? I don’t think they count as one of your five a day....]

Fish prices also rose, increasing by 1% between December 2020 and January 2021, the ONS adds:

The largest price increases were for frozen fish fingers and prawns, and fresh salmon fillets.

Confectionary prices also rose, driven by boxes of chocolates (also not one of your five a day!).

A surge in demand for new furniture from locked-down families may have contributed to the rise in inflation.

The Office for National Statistics reports that there was “reduced discounting to prices of leather settees and double beds” in January, adding:

There were smaller upward contributions across the household textiles; household appliances, fitting and repairs; and glassware, tableware and household utensils groups, with the only standout movements coming from fitted sheets and duvets.

Furniture makers reported last year that demand was at unprecedented levels, with some households splashing out on new sofas and beds.

This chart shows how prices changed in January -- with furniture, food and transport pushing the inflation rate up, while clothing and shoes were discounted in the sales: