| Index | Close | Change |
|---|---|---|
| FTSE 100 | 6091.4 | 40.7 |
| Dow | 12891.9 | 42.9 |
| NASDAQ | 2422.9 | -6 |
FTSE 100, Dow, NASDAQ, 2008-04-27
Oil, gold, pound, dollar, euro, 2008-04-27
| Rates | Close | Change |
|---|---|---|
| Oil | 119.35 | 3.6 |
| Gold | 894.7 | 3.1 |
| $ to £ | 1.985 | 0.0108 |
| € to £ | 1.2678 | 0.001 |
| $ to € | 1.5657 | -0.0021 |
Oil, gold, pound, dollar, euro, 2008-04-25
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 6050.7 | -32.9 |
| Dow | 12849 | 85.8 |
| NASDAQ | 2428.9 | 23.7 |
Oil, gold, pound, dollar, euro, 2008-04-25
| Rates | Close | Change |
|---|---|---|
| Oil | 115.75 | -2.32 |
| Gold | 891.6 | -15.9 |
| $ to £ | 1.9742 | -0.0045 |
| € to £ | 1.2592 | 0.001 |
| $ to € | 1.5678 | -0.0178 |
Inflationary pressures ease where it matters
You could be forgiven for concluding the government and regulators are caught between a rock and a hard place. Inflation is back, right? It could even rise to more than a full percentage point over the Bank of England’s target this summer, enforcing another of those embarrassing letters from its governor to the chancellor. This would suggest interest rates need to go up. At the same time the arguments for a cut in rates are obvious and, frankly, further cuts seem inevitable.
So, on the one hand, the economy desperately needs lower rates to counteract the effect of the credit crunch. On the other hand, it needs higher rates to stop inflation in its tracks. It has been heralded by some as a choice between 1970s-type inflation or 1930s-type depression. What a dilemma.
It’s just that it isn’t like that at all, as data from IRS on wage inflation released yesterday shows.
It all boils down to the difference between inflation and price rises.
Prices go up if demand is greater than supply. Inflation is a sustained rise in prices, caused not so much because demand is greater than supply, but because the dampening effect of higher prices is cancelled out by something else, creating a situation in which demand is permanently higher than supply.
So oil goes up, wheat goes up, and then rice goes up in price. The key to determining whether we have inflation is what happens next. Even then, even if inflation seems to occur, we still don’t know whether the answer is higher interest rates until we examine the causes of this secondary effect of rising prices.
There are three possible scenarios, only one means higher interest rates.
Scenario one: Commodities have been going up in price because of pressure on supply. Higher prices should reduce demand until equilibrium is restored – prices then become flat. Inflation has not occurred. We are all a little worse off. This is how it should be. If there isn’t enough food or oil to go round then we should all lose out. If we don’t, something is wrong with the price mechanism.
Scenario two: Prices continue to rise because of supply or external factors. So, if we have had a run of bad luck, successive bad harvests, for example, constraining supply, prices will rise, but it has nothing to do with domestic demand pressures. Prices go up, and we are worse off – and again it should be that, we can not be immune to paying the costs of bad harvests. Alternatively, demand might be rising in other countries – this might mean demand is too high on a global scale but British consumers themselves are not putting prices under pressure. This is not a reason for higher domestic interest rates.
But scenario three is more serious. As prices rise, we enjoy higher wages. We are not worse off. There is no magic in economics. If prices rise because products are costing more, then we are either worse off, or deluding ourselves. This is when inflation becomes a problem. This is when inflation becomes a form of delusion – and once it sets in, it is difficult to stop it.
The good news came yesterday, because IRS revealed that the median rise in wages agreed by wage negotiators in the first quarter was just 3.5 per cent – below rises in the retail price index.
Of course, current demands by teachers for above-inflation wage rises might be justified from a moral point of view, but the view that wages need to rise to keep up with price rises is just bad economics.
Normally, one would expect inflationary wages during a time of lax monetary policy. Excess money creates the lubricant for inflation-busting pay rises. If there is too much money floating around the system, an upward self-supporting spiral of rising prices can be created.
A credit crunch must presumably mean less money in circulation. That’s why cuts in interest rates can be justified, and why they won’t necessarily be inflationary.
But have no doubt that higher commodity prices will hurt us – either in the form of less disposable income, or in the form of higher inflation – leading to higher interest rates.
There is nothing central banks can do about that.
Good news – Japan’s inflation rises
Talking of inflation, while in the UK we fret over it, in Japan they want it. The Japanese economy has been characterised by falling prices – and it was fears that the US could follow in Japan’s footsteps that led the Fed to slash interest to 1 per cent earlier this decade. And that’s the oddity. In the West, the Holy Grail, at least for some economists, is how to create growth without inflation. In Japan the problem has been growth, but not enough inflation.
Whenever we think of the economy of the Rising Sun, we tend to think of permanent sunsets. Economic performance in the country has been awful – and for Western economists it has taken on a meaning not unlike the role of the bogey man in children’s stories. Central bankers may wake up in the middle of the night in a cold, cold sweat, because they dreamt of Japan’s lost decade.
Yet, strangely enough, Japan has actually been expanding for six successive years – and the growth has even been quite respectable too. Real GDP grew by 1.5 per cent in 2003, and then 2.7, 1.9, 2.2 and last year 2.3 per cent .
Given this expansion one might be justified in arguing why is Japan hailed as the stuff nightmares are made off. Well, for one thing, the period before was much worse, so Japan had a lot of catching up to do – so growth should have been better. For another, Japan has this neighbour called China, and you would have expected more of China’s success to rub off on Japan – after all, China accounted for 14.3 per cent of Japan’s exports last year and 20.5 per cent of imports.
A part of the trouble with Japan is that it doesn’t have inflation. And when consumers expect prices to fall they hold off on their expenditure – they wait until next week when that product they were after might be cheaper. The Bank of Japan cut interest rates to zero per cent, but actually, in an environment of falling prices, it still paid to save.
And while in the West money markets were flooded with money leaving Japan via the carry trade, presumably in Japan the problem was the opposite – not enough money coming in.
That’s why Japan needs inflation – not too much, of course, but better some inflation than deflation.
And that brings us back to the theme of the previous article. Sure, Japan needs inflation, but it has to be the right type of inflation.
Anyone can have inflation at the moment – that’s easy. With oil and food so high, prices are of course rising. So there was no surprise, then, when it was revealed that Japan’s core inflation rate has hit 1.2 per cent.
Before we continue, it is worth pointing out a little Japanese quirk. In the UK, by core inflation we mean with energy, food and tobacco stripped out. In Japan, however, when calculating this measure it only strips out fresh foods. So it is a funny kind of core inflation. And many would argue that it is the wrong type of inflation.
But, and this is the interesting bit – it seems that rising core inflation has led Japanese consumers to expect higher prices. Furthermore, if you dig a little deeper into the inflation figures you find that even after stripping out all food and energy costs, prices still went up on last year.
Okay, the rise on last year was tiny – just 0.1 per cent, but it is the first rise in Japanese inflation after all food and energy since 1998.
So at last then we have good news from Japan. Many expect the economy to fall into recession this year – it may even already be there, but maybe at last the return of inflation provides scope for a consumer-led recovery.
It makes a change to say good news, inflation is up – but on this occasion, it appears those sentiments are apt.
There is another lesson too. It appears Japanese underlying inflation is being kick-started by rises in the prices of one-offs. In Japan that’s good. But the parallel to the UK is obvious. It is just in our case the danger is that rising food and oil prices will push underlying inflation too high.
That’s why we are right to fret, and Japan right to celebrate.
Top housebuilder puts all building plans on hold
Markets correct, they say. Yet it is difficult to know what to make of the latest news from housebuilder Persimmon (that’s Charles Church and Persimmon Homes) that it has put all plans to build new houses on hold. It also revealed yesterday that revenue so far this year is a quarter down on the same time last year.
You will recall, for much of last year the big debate about house prices related to shortage of supply. The government then bandied about figures targeting 240,000 new homes a year. Some said this was unrealistic. Others said even if targets were met it still wouldn’t be enough, and property bulls said it all went to show this proved the argument house prices would not fall.
And yet this is what Mike Farley, top brass at Persimmon, said yesterday, “I have been in this business for 30 years and this is the first time where there simply isn’t enough mortgage availability. There isn’t enough money to go around.”
So, the credit crunch has led to housing woe, has led to lower housing construction, will lead to the housing shortage getting worse, and this presumably will lead to higher prices.
James Rowlands, the public policy officer at the Royal Institute of Chartered Surveyors, said, “This warning from the stock market shows that there is an immediate problem and house building levels will fall further from where the Government is aiming to be.”
Yet, at their current levels, the cost of building a house relative to the price it can be sold for is still very cheap.
From housebuilders’ point of view the problem is twofold. Firstly, the price of land eats into margins – so there is a limit to how much they can afford to cut prices. Secondly, demand is so low that if builders were to continue building at last year’s levels, there would be a massive glut of homes relative to true demand – that’s demand as a function of price.
It seems the real problem lies with planning regulations that have distorted the market in the past, and the creation of a housing bubble. Bubbles of the type the UK property market has experienced are a bad thing, because they always lead to an extreme reaction in the other direction.
If house prices were 20 per cent lower than they are at present, and there had been no surge followed by fall, rather a steady rise, then right now housebuilders would be counting their blessings.
The problem is not that lower house prices will dent builders’ profits, the problem is that rising prices followed by falling prices is creating too much uncertainty.
Then again, falling prices may go somewhere to correcting the number of houses in the UK that are under-occupied.
You may have read our article yesterday, which told how there are around 6.8 million homes that are under-occupied. Capital Economics argued that owner occupiers tend to live in houses that are a lot bigger than they need, because they see the spare space as an investment. In fact, according to the Survey of English Housing, no less than 47 per cent of existing owner-occupier dwellings are under-occupied. Tellingly, only 18 per cent of private rented properties are under-occupied.
So, maybe in an environment of falling house prices, much of this spare underutilised space will be freed up.
“They don’t believe it” – High Street boomed in first quarter, says official data
What a miserable lot economists are. They wait for good news, and when it finally comes along, they turn their noses up and say, ”the statistics are probably wrong, anyway.”
Yesterday, the Office for National Statistics, which by the way is now independent, and has launched a new web site but which is totally un-navigable, released its latest data for retail sales.
And it was good news.
March saw retail sales down 0.4 per cent, but for the three months from January to March retail sales leapt a remarkable 2.6 per cent. The ONS talked about the retail sector enjoying robust growth.
But it just doesn’t make sense. Retail’s captains, the likes of Philip Green, have been moaning about how tough things are – the toughest they can remember, some say. Others, the likes of the British Retail Consortium and CBI, have been reporting bad news with tedious regularity.
Maybe the UK’s High Street is full of Moaning Minnies – or maybe the problem is something else.
Today, The Times headlined: “High Street’s boom figures under question,” while Capital Economics said, “We continue to have our doubts about how accurate a picture of High Street demand the official figures are giving.”
Perhaps we are actually seeing the difference between the big supermarkets and the rest shown up in starker relief.
While the likes of Tesco recently revealed that profits were up 11.8 per cent, sales were up 11 per cent, and like-for-like sales were up 3.5 per cent in the year to February, other retailers seem to be suffering. For example, in the 13 weeks to December 29, like-for-like sales at Marks and Spencer fell 2.2 per cent.
ONS data, it appears, is more heavily influenced by the big supermarkets.
Mind you, sales might apparently be keeping up, but prices are falling. The ONS retail sales deflator fell from -0.6 per cent to -1.2 per cent in March.
Oil, gold, pound, dollar, euro, 2008-04-24
| Rates | Close | Change |
|---|---|---|
| Oil | 118.07 | -0.08 |
| Gold | 907.5 | -15.4 |
| $ to £ | 1.9787 | -0.0166 |
| € to £ | 1.2479 | 0.001 |
| $ to € | 1.5856 | -0.0135 |