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iPhone X, premium roasted coffee and the Bank of England

22 September 2017

What’s cheaper, the new iPhone X or a daily cup of premium roasted coffee?

In 2007, Apple launched the first iPhone. Now 10 years, 15 iterations and over 1 billion handsets later, we have been treated to the newest edition: the iPhone X. Whilst it certainly has some exciting and impressive new features, such as facial recognition and wireless charging, many consumers have balked at the £1000 price tag. Apple has been tickling up the price of the product over the past decade as it lures more and more consumers into its integrated network of devices and systems. People have been shocked, however, at the four-figure price on the newest model. But in reality, how affordable is it?

Consider it this way, for example, it is not uncommon to indulge in a cup of roasted coffee each morning. At roughly £3 a day for 2 years, this will cost me £2190. In total, this is a significant amount yet I am happy to spend it because of the utility I derive from my coffee each day.

Of course, I could get a budget instant coffee for far cheaper but I am content to pay a premium for the quality. In a similar way, I am willing to pay a premium for the extra features, functionality and attractiveness the iPhone X has to offer compared to its more affordable peers.

Let’s say you need the larger memory £1150 version, as well as a hefty £40 a month carrier deal for good measure. If you hold the phone for 2 years, this will cost you £2110 in total or £2.89 a day. Therefore over a 2 year period, I would spend roughly £2150 or £3 a day on both premium coffee and my iPhone X.

What do I get more utility out of: emailing, texting, phone calls, internet, games, films, music, maps and infinite other applications at the touch of a finger or a hot drink each morning? Loyal customers have swallowed iPhone price rises in the past. Time will tell whether this is a step too far or whether consumers can look at the price point in the sort of rational manner that I have outlined here. Or perhaps it is time we went back to instant coffee…

Why has the Bank of England turned so hawkish?

At its September meeting, the Bank of England’s (“BoE”) Monetary Policy Committee left interest rates on hold at 0.25%. This was widely expected by markets and whilst the split of the vote was marginally more dovish than the prior meeting, the central bank’s subsequent commentary appeared on the hawkish side. They stated that there remains scope for a reduction in stimulus over coming months in light of the limited slack in the economy. It was stressed that any hikes in the future are likely to be gradual and limited, and are being under-priced by the market.

We believe that the BoE is facing a credibility crisis. In order to avoid hiking rates earlier this year, they changed the level it deemed the economy as fully employed from 5% to 4.5%. This enabled the BoE to stay put while the uncertainties of Brexit negotiations played out. As the most recent unemployment rate came at 4.3%, the lowest in 42 years, it is very difficult now for the BoE to argue that there still remains a lot of slack left in the economy. Central bank policy is in part driven by the Philips curve theory (low unemployment rate leads to stronger wage growth) which implies that they should raise interest rates so the economy does not overheat.

The consumer continues to feel the pinch of Brexit uncertainties with inflation outpacing wages. This combined with concerns about unsecured debt levels raises questions about the health of the consumer, the key driver of the British economy. In the short term, economic conditions may warrant the BoE to unwind the emergency rate cut it undertook following the Brexit vote. Following that, it is only likely to continue hiking rates in a gradual fashion if economic conditions remain favorable.

 

 

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