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Pick your economic poison

The June inflation figure is a bit of a worry, and it should be. First, because inflation will eat into margins on advance holiday bookings priced when inflation was lower.

Second, because it will suck up consumer spending on necessities, leaving less money for travel - whatever the industry says to the contrary.

Third, because it nails the idea of a cut in interest rates - rising rates are more likely - and means an overall tightening in the economy.

The Consumer Price Index for June shows prices up 3.8% year on year following a 3.3% rise in May. The monthly increase is greater than the 3.3% to 3.7% economists were predicting. But the real picture is worse, since the CPI does not include the cost of housing. The more useful Retail Price Index shows a 4.6% rise last month.

If the price increases were on flat-screen televisions, gourmet meals, Burberry coats or stiletto heels it might be less of a problem. But the biggest rise was in the cost of food - up 9.5% on June 2007.

Unpick the increases and the figures are even more alarming. Price-comparison site mysupermarket led the Times to report pasta up 85% over 12 months, rice up 76%, bread 39%, eggs 36%, cheese 35%, tea 26% and milk also 26%. There is not much in that list that could be deemed discretionary.

The government is trying to enforce a 2.5% cap on pay rises in the public sector, remember - which no doubt includes a lot of people who book holidays and may be less likely to do so if they do not earn more - leading 650,000 council workers to strike tomorrow and Thursday.

Further price increases are on the way. The prices UK manufacturers charge for goods rose 10% in the year to June - the highest for 20 years. Strip out food and the increase was still 6.4%. This is not yet Zimbabwe, but you see where we are heading.

Latest figures from the British Retail Consortium reveal a 2.1% year-on-year increase in sales by revenue - less than half the RPI inflation rate - suggesting retailers are making less money when inflation is factored in.

The pain may not yet have reached the travel sector - the usual quota of "Bad weather sends travel bookings soaring" stories abound. But analyst Ernst & Young warns travel is not immune. Its latest quarterly report on UK quoted companies makes some important points.

First, profit warnings among general retailers are at record levels and clothing sales - largely discretionary spending - show the biggest decline since the early 1980s.

Second, fuel hedging has seen many travel companies through till now but, "If the oil price remains high beyond the life of the hedges, failures look inevitable."

Third, tour operators say they have learned the lessons of past downturns, but the industry is not immune to falling consumer confidence.

Fourth, the new players in travel have no experience of a downturn. Fifth, retailers may drive sales by discounting only at the risk of "crippling effects on profits".

Ernst & Young describes the combination of factors facing the industry as "exceptionally toxic". Pick your poison.

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