The ghost of inflation past has returned to haunt the markets. Walmart, the world’s largest retailer, issued a stark warning this week: consumers are tightening their belts, and the impact is being felt from Bentonville to Birmingham. For those of us who have watched the UK high street bleed out over the past decade, the parallels are as clear as the numbers on a balance sheet. Petrol prices, the silent tax on the working class, are once again driving up inflation and squeezing margins to breaking point.
Let’s start with the numbers. Walmart reported that its US customers are increasingly trading down to cheaper products, a classic sign of consumer distress. The retail giant’s shares tumbled 7% on the news, and the FTSE 100 followed suit, with a 1.2% dip in early trading. The reason is simple: when the world’s biggest retailer speaks, markets listen. And what it said was that higher fuel costs are eating into disposable income, forcing households to cut back on discretionary spending. This is not a new phenomenon, but it is a worrying one. In the UK, the average price of petrol hit 145.7p per litre last week, a 10% increase year-on-year. That is a direct hit to the consumer wallet, and it ripples through the economy like a stone dropped into a pond.
The connection between petrol prices and inflation is a dirty little secret that central bankers would rather ignore. The Bank of England has been grappling with a stubbornly high CPI, which remains above the 2% target despite months of tightening. Petrol costs feed into almost every good transported by road, which is to say, almost everything. This is not just a UK problem; it is a global one. But the UK high street, already battered by Brexit, rising taxes, and the shift to online shopping, is particularly vulnerable. Footfall in UK retail parks has fallen 3.5% in the past year, and vacancies are rising. The spectre of shop closures and job losses looms large.
What does this mean for the savvy investor? It means that capital flight is likely to accelerate. The gilt market is already pricing in a higher risk premium, with the 10-year yield rising to 4.3%, up from 3.8% three months ago. Investors are demanding a return for holding UK debt, and that is a sign of waning confidence. The Bank of England may be forced to keep rates higher for longer, which will further squeeze mortgage holders and small businesses. The cycle is vicious, and it is self-reinforcing.
Fiscal responsibility, or the lack thereof, is at the heart of this mess. The government’s spending spree during the pandemic has left the public finances in a precarious state. National debt is now 98% of GDP, and tax revenues are failing to keep pace. The Chancellor’s recent Budget, with its increase in National Insurance and corporation tax, is a short-term fix that does nothing to address the structural weaknesses in the economy. The market is not fooled. Gilt yields are rising because investors are pricing in the risk of stagflation: high inflation coupled with low growth.
The Walmart warning is a canary in the coal mine. If the world’s largest retailer is seeing consumers pull back, you can bet that the trend will hit the UK shores with a vengeance. The British high street, already a shadow of its former self, could face another wave of insolvencies. Petrol prices are not going to fall anytime soon, given the OPEC+ production cuts and geopolitical tensions. That means inflation will remain sticky, and the Bank of England will have to keep its foot on the brake pedal. The result is a slow grind lower for the economy, with higher unemployment and lower real wages.
In my 20 years in the City, I have seen this movie before. It ends with a recession, a government bailout, or both. The only question is how painful the adjustment will be. For now, I am recommending a defensive posture: overweight cash and short-dated bonds, underweight retail and consumer discretionary stocks. The high street is bleeding, and there is no tourniquet in sight.
