UK: Sterling depreciation and cost inflation negative for 2017 outlook – HSBC

Research Team at HSBC, explains that the demand pull inflation is favourable for retailers as a supply shortage allows gross margins to increase and this differs from cost push inflation which cannot always be easily passed on without impacting volumes.

Key Quotes

“Some commentators confuse the two, however the latter is negative for retailers. In this environment we would favour retailers that are able to grow volumes as this is the best weapon to cope with cost inflation. Against the backdrop of a fragile recovery in consumer spending, slowdown in household disposable income growth, and reduced appetite for major purchases, the impact of higher input cost in 2017 is a headwind for the sector. It will compound increases in UK minimum wage, business rates and utilities costs creating an industry margin squeeze. HSBC forecasts 3% CPI in 2017, broadly twice the forecast rate of wage inflation. We expect Christmas to benefit from resilient consumer demand short term. However the outlook for 2017 is much less certain.”