Oil and trade tensions pile on inflation pressure, but consumers keep spending on fashion
Susannah Streeter, chief investment strategist, Wealth Club: “The FTSE 100 has opened lower as investors assess a toxic cocktail of inflationary pressures, with Brent crude nudging towards $100 a barrel and the US-Canada trade war escalating, adding another potential brake on global growth. Far from showing signs of resolution, the conflict in the Middle East appears to be becoming more entrenched, creating chronic supply concerns around crude and gas, while intensifying trade battles threaten to push up the cost of goods just as central banks are trying to get inflation under control.
This may be a bonus for energy companies, with Shell and BP rising in early trade, but it’s highly painful for companies and consumers, and puts more pressure on central bankers to raise interest rates. Given the sustained impact of higher energy prices, the worry is that firms will have little choice, other than to raise prices, which risks creating another inflationary spiral. The prospect of higher rates is showing up in the bond markets, with gilt and Treasury yields shifting up yet again, making borrowing more expensive for governments, increasing the prospect of higher interest payments on the huge debts already piled up.
Brent Crude has raced higher, hitting $100 for the first time since July, after Iran ratcheted up its offensive on the US and its allies, hitting two American vessels and firing missiles towards Jordan, while threatening crews in ports in Bahrain and Kuwait. More oil tankers have been struck, and Houthi rebels have also been attacking Saudi Arabia’s Jazan refinery, heightening supply worries about energy shipments. It comes after the US military targeted infrastructure on the key Iran export hub – Kharg Island. While other oil-producing nations have increased production, it’s not enough to offset the disruption wreaked across the Middle East, with prices looking set to stay stubbornly around $100 a barrel. UK and European gas prices have also risen again to levels not seen since December 2022. Usually, weaker demand for gas and lower prices during the summer months means stocks can be replenished, but the crisis has kept this process on go slow, and as we head towards the colder winter months, storage levels in the UK and Europe are the lowest for 13 years, keeping nations reliant on imports of expensive supplies. It’s set to add to the bill burden of households this winter, with domestic energy prices set to ramp up if a resolution to this conflict remains elusive.
The trade war between the US and Canada has also moved up a gear, with Washington banning a range of Canadian imports, including dairy and alcohol, after Canada imposed retaliatory tariffs on US goods. It’s another unwelcome inflationary jolt, as tariffs push up the cost of goods and leave businesses and consumers footing more of the bill. And at a time when oil prices are already surging, the combination of more expensive energy and more expensive goods is a particularly nasty cocktail, threatening to squeeze consumers, dent business investment and put another drag on global growth. While the TACO trade – ‘Trump Always Chickens Out’ is still alive to some extent, with investors used to expecting threats to be softened or reversed, but this more capricious approach to policymaking is highly disruptive. Even when trade deals are struck, other countries can’t be sure they’ll hold, making businesses more reluctant to invest and plan ahead.
However, there are pockets of resilience amid all this uncertainty. Fashion lovers seem to have shrugged off worries about conflict and climate change and spent big on wardrobe refreshes. Zara owner Inditex has reported a record €19.8 billion in first-half sales, up 7.6%, with profits rising 6.8% to just under €3 billion, while sales in August and early September jumped 9%.
It’s a pretty strong fashion statement and a badge of honour for Zara’s design and merchandising teams who are on the money when it comes to creating the looks to make shoppers part with their cash, even when household budgets are under pressure. There’s still appetite for retail therapy, particularly if the price is right, with Bershka and Stradivarius delivering double-digit sales growth. These brands are at the slightly cheaper end of Zara’s wardrobe of fashion names, and seem to be touching the sweet spot when it comes to a desire for style updates, while keeping an eye on tighter budgets. Sportswear brand Oysho also saw sales grow by more than 20%, capitalising on the desire to get fit and the growing gym scene.
The Gym Group has been flexing its pulling power among young fitness fans, with sales jumping even though it put up its fees. Membership prices increased by 10%, but the numbers signing up still rose by 5% in the first half. The Gym Group has now reached around a million members, showing that going to the gym has become a deeply embedded habit. It’s also the price point that matters, because even after the recent increases, memberships remain around the £25–£30-a-month mark at many sites, which is a fraction of the cost of premium health clubs such as David Lloyd. The Gym Group’s average member is around 30, with Gen Z now making up 44% of its membership. It’s clear that the gym is increasingly becoming a crucial part of social lives rather than simply somewhere to go and work up a sweat. It’s a sign of changing spending habits and priorities among younger consumers, with a gym bench rather more appealing than a pub bar.”