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Our views 05 February 2024

JP’s Journal: Social changes point to longer-term policy needs

5 min read

Last week, a headline mentioned the increase in use of lunchboxes, with 86 million more taken to work and school than the year before. This was attributed to the cost of living crisis but I think health factors are also contributing.

I notice more self-made food being consumed in our office, often with low fat and high protein content, and the fridge has various kinds of milks. As a dairy farmer's son, I thought milk came from animals, mainly cows. But it seems not. My colleague Ben Nicholl tells me that pea milk is gaining popularity.

Is dry January, gym time and healthier eating just a passing trend? Actually, I don't think so; there are some big changes happening. It could be my age, but societal change seems much faster. The under-25 age group is now more likely to abstain from alcohol than any other group. And this influences others. I did not attempt dry January but I did drink less alcohol. I may not be invited onto Love Island, but I think that body image is playing a role in changing attitudes, with younger people being more health aware – not good for alcohol makers and pubs. But there is another side to the story. We hear of an obesity crisis among children, reflecting poor diet and lack of exercise – worsened by Covid restrictions. There is also the rise in food banks, as more struggle with food price inflation. A strange mix of real problems.

An article in the Spectator also caught my eye last week. It had the headline "The Surprising truth about Nanny State Britain". It argued that the British people are now quite open to government interventions, especially to improve health outcomes. That's why there was little resistance to the proposed new rules on vaping and the gradual end of tobacco sales – aside from Liz Truss. On the fourth anniversary of the UK leaving the EU, the idea of reducing the role of the State seems less likely and, in fact, the direction is the opposite. We expect more from government, not less. It is a theme to which I keep coming back – look past the upcoming election and the talk of tax cuts. Taxes will go up in the long term, hopefully structured in a more logical way, and the effectiveness of government spending will be a key factor in economic and social progress. Let's hope we can learn from the HS2 high-speed rail line, Hinkley Point nuclear power station and well-documented issues with defence procurement and that we can boost productivity in some critical public sector areas.

Up to last Friday the market focus was on central banks. The US Federal Reserve (Fed) kept rates unchanged and indicated that a reduction was not likely in Q1 – more proof of good inflation data is needed with special attention to labour markets and wage trends. The outcome was that year-end expectations stayed the same but there was a small pull-back in March pricing. Likewise, the Bank of England (BoE) decided to keep rates steady although two members still voted for an upward move to 5.5% while one preferred a cut to 5%. The wording in the minutes was less hawkish than before – services inflation and pay growth are key to BoE thinking. Using market forecast of implied interest rates the BoE estimate that consumer price index inflation will be above the 2% target at the two-year horizon but at target at the three-year horizon.

The US data on Friday was surprising. The number of jobs added in January exceeded expectations, with a large positive revision for December. The increase came from various sectors, such as professional/business services, healthcare, retail trade and social assistance categories. The unemployment rate fell more than predicted while wage growth rose faster than anticipated. This is not likely to persuade the Fed to lower rates soon and global bond markets were unsettled by the further delay to the soft landing scenario of lower inflation and rate cuts. Whilst the yields on US 10-year treasury bonds rose following the Friday data, they still finished the week lower at 4%. In Germany the yields on 10-year bonds settled above 2.2%, down 5bps on the week, while in the UK the rally of 20bps by midweek was cut in half, with 10-year rates ending below 3.9%. Credit markets took these moves in their stride. High yield spreads nudged higher whilst investment grade spreads were broadly unchanged. Renewed concern about US regional banks did not translate into wider concerns but it is an issue that needs close monitoring.


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