Inflation is going to lead to bumper levels of borrowing, according to LendingMetrics’ CTO Neil Williams.
It’s no secret that the UK economy has entered an era of higher inflation following a long period of very modest price growth. Over the last 20 years, prices have only edged above the two per cent mark once back in 2011, when they briefly hit 4.46%, only to quickly revert to more ‘normal’ levels.
This time around, there aren’t many of us who would predict that prices will fall back quite so quickly, and that’s because we are in a very different place to that of 2011. Back then, the drivers of inflation, wage growth and product prices, were being held firmly in check by a plentiful supply of labour, supported by the free movement between the UK and the rest of the EU, and a seemingly inexhaustible supply of cheaper manufactured goods from the Far East.
Today, labour is a much more scarce resource and supply constraints brought about by the pandemic have resulted in steeply rising prices for goods and services. Further pressures are in the pipeline in the form of significant higher oil prices and this is in turn feeding in to employee wage expectations.
Undoubtedly, we are in for a spell of continuing inflation at, or above, the five per cent mark, in fact in a recent interview for the Guardian, Isabel Stockton, a research economist at the Institute for Fiscal Studies said “interest payments on indexed linked debt were calculated using an alternative measure of inflation, the retail prices index which is running at 7.8%” and wider predictions have even suggested double digit inflation rates later this year.
The money we have in our pockets is not going to go as far as it used to and our savings are set to be whittled away over time.
The mainstream media will present this as a uniformly bad thing, which is largely true, especially if it leads to a wage-price spiral as it has at times in the past. But inflation is not all bad news. Like a lot of things, it does have an upside.
What is often forgotten is that inflation stimulates economic activity. It acts as a spur to greater levels of spending and - by implication - borrowing over and above that which would apply during periods of low inflation.
During times of high and rising prices, consumers see little point in holding on to the cash that they have when they know it is steadily losing its value over time. Why delay the purchase of something when, the longer they wait, the more expensive it will be?
Inflationary periods in the past have all featured this spending incentive, particularly when the cost of borrowing has appeared comparatively low when set against high inflation.
This increased spending and borrowing skyrockets as consumers realise that saving money to purchase a product outright may not make sense. Why wait, given that the product is likely to be that much more expensive and their savings worth that much less?
This is particularly the case when consumers can access low rates of interest. At the present time there is a lot of finance available on rates of interest substantially lower than the inflation rate.
We do not know how long this disparity will remain in place, but, so long as it does, there will be a powerful impetus to borrow and spend now rather than later, particularly for short term needs.
At LendingMetrics, we believe that the rising level of UK inflation is more than likely to spur a UK borrowing surge in the coming months. We have the drivers in place: a high inflation rate, plus a plentiful availability of lower interest rate loans.
Canny borrowers can currently avail themselves of finance that appears amazingly good value when set against inflation’s 5.4% (December’s Consumer Price Index) or nearly 8% depending on which measure you subscribe to. Buy Now Pay Later borrowing - already a £2.7 billion sector - can expect to go from strength to strength over the coming months, as can other lenders with competitive products.
This buy-and-borrow-now phenomenon will take place against a backdrop of large volumes of deferred purchasing.
Consumers are only now fully shaking off the restraints that Covid has placed on them and their spending levels. There is an awful lot of consumption that has been suppressed over the past 18 months and it is now coming to the surface.
Already we can see this beginning to happen in our data.
The volume of transactions that passed through our company's Auto Decision Platform (ADP) jumped 56% during January 2022, as compared to 2021. This came on top of a 35% rise across our products during the fourth quarter of 2021 and an 18.9% rise in the third quarter.
We see every reason for this trend to continue through the remainder of the first quarter of 2022 and into the Spring. With Q1/22 being 42% higher than Q1/21, our prediction is that April-June (Q2) spending may be up some 25% compared to last year. That will take it above the pre-Covid second quarter of 2019.
Lenders that have the right product at the right price, and, importantly, the back-office capability to flex with dramatically increasing volumes, are well placed to do very well over the coming months. They should prepare for a record 2022.