June 10, 2008 | posted by Michael Baxter in inflation | comments (0) |

What a dilemma.  Yesterday, we told how some workers are accepting cuts in wages – in the longer-term this could lead to a period of deflation, especially when oil and food prices peak, and then in due course work their way out of the annual inflation data.  But that is a problem for next year, maybe the year after.    Right now, it is the opposite, and more evidence emerged yesterday to suggest inflation is back.

In fact, the latest data from the Office for National Statistics was so bad that economists were being forced to give their Thesaurus a battering, as they reached for the right words.    “Absolutely horrendous,” said Jonathan Loynes at Capital Economics; “Absolutely appalling,” said “Howard Archer at Global Insight; and “Absolute Beginners,” said David Bowie.

It’s producer prices that are bringing such woe.  Non-seasonally adjusted year-on-year input prices rose by a stunning 27.9 per cent in the year to May.   It’s a record.  Even more alarming, if you strip out food and oil, prices were still rising by 14 per cent.

Then there’s manufacturers’ output prices, that is to say, what they charge their customers.    Ouput price inflation hit 8.9 per cent, and even underlying inflation, that’s with food and energy taken out, was 5.9 per cent.

Okay, food and oil will stop rising, eventually, and as we have argued here several times recently, beyond that may well fall.  But news of rising underlying prices is ringing some seriously loud alarm bells.

Capital Economics said: “Admittedly, some of the rise in ‘core’ PPI inflation reflects sharp increases in those elements which are heavily influenced by oil prices, such as chemicals. But other components such as machinery and equipment have also seen prices rising more quickly over recent months.”

It does of course leave the Bank of England with a terrible dilemma.  With bad news seemingly the UK’s biggest import at the moment, British industry needs a rise in the rate of interest like it needs a hole in the head.

And yet, a rise in interest rates is precisely what money markets are factoring in.   In fact, yesterday, the SWAP market for two-year mortgage deals saw its biggest one-day increase since 1992.

Capital Economics says: “The chances of a recession are growing by the day.”   

Yet, with credit so tight, with no evidence wages are seeing inflation-busting rises, the prognosis for inflation in the longer-term still sits in the balance.  The Bank of England runs the risk that by fighting the inflationary pressures that are currently exerting so much pressure, it could be stoking up deflation further down the line.

June 10, 2008 | posted by Michael Baxter in inflation | comments (0) |

The sun put its hat on in May, consumers went out to play, and retailers said hip hip, hooray.

March and April saw the worst year-on-year performance since 2005, said the British Retail Consortium (BRC) this morning, but, in May, UK retail sales values rose 1.9 per cent on a like-for-like basis, compared with May 2007, when sales were up 1.8 per cent.

BRC said: “Some warm sunny days this May compared with very wet weather last May boosted sales growth,” and “food sales strengthened, with clothing seeing year-on-year growth after several months of declines.”

But alas, it wasn’t all good news.  “Underlying trade remained tough, with widespread discounting,” and “furniture and larger homewares remained well down on a year ago, despite continued discounts and promotions,” said BRC.

Stephen Robertson, Director General, British Retail Consortium, said: “After several mostly miserable months, warm sunny weather finally arrived in early May and helped lift customers’ gloom. Significantly clothing sales saw year-on-year growth for the first time since last August, while sales of footwear, outdoor leisure and gardening goods also rose. But we are not out of the woods yet. The economic fundamentals remain weak. BRC/Nielsen consumer confidence figures show the economy is the major concern for a third of people. The housing slowdown and tighter household budgets meant that, despite heavy discounting, furniture sales were well down on a year ago and there was a continued slowdown for electrical goods.”  

Frankly, with house prices in such disarray, it is a miracle that the High Street is bearing up so well.  Some will say this provides more evidence that consumer spending is not influenced by house prices.  But the truth is, the relationship is complex and time lags are involved.   People are complicated, and just because a few months of bad news do not lead to the populace rushing for tranquilisers, it does not mean there is no link between consumer spending and house prices.    

Mind you, the latest news from Alliance Boots would suggest that actually the High Street is in rude health – not that a pharmacy retailer wants us to be in rude health – presumably, it wants us to get a touch of hay fever or some other ailment.

Alliance Boots is owned by private equity these days, and as such is not obliged to tell us anything.  But this morning, it did anyway.

Like-for-like sales rose 1.9 per cent over the last year, revenue jumped by 4.8 per cent and profits soared 20 per cent.

A year ago, it was bought out by ’barbarians at the gate’ Kohlberg Kravis Roberts.  Its chairman Stefano Pessina comes from the Alliance side of the family.  You may recall before the private equity buyout, he was less than flattering about the City, and grew increasingly frustrated by what he considered the City’s short-termist outlook.

When Boots and Alliance UniChem merged, the city gave the whole idea a slating.  At the time, for example, Philip Dorgan, an analyst at brokers Panmure Gordon, was quoted in the Telegraph as saying : “This is an absolutely terrible deal. It doesn’t make sense. Boots needs another 900 shops like a hole in the head. The most important thing is for Boots to sort out its own shops.”
 
Yesterday, Mr Pessina talked about cost savings as the two parts, Alliance and Boots, are merged.  Maybe he was keen to get one over the City he has such low regard for, and this explains why Boots went against the normal private equity way of doing things, and revealed the figures.

This does of course mean it is hard to tell whether the Boots results are evidence that the High Street is still strong, or merely point to a successful merger. 

May 13, 2008 | posted by Michael Baxter in inflation | comments (0) |

It was around 15 months ago when the Bank of England governor put pen to paper and wrote his infamous letter to the then chancellor, a certain Mr Brown, to explain why inflation had hit 3.1 per cent, more than a full percentage point above the 2 per cent target.  At the time, the governor was left with egg on his face, and everybody expected interest rates to go up.

This morning, the latest inflation data was out, and this time we went within a whisker of letter writing territory again.     Inflation hit 3 per cent, and it seems odds on that it will rise again soon, eliciting another letter.

In fact, Mr King must hope he has plenty of ink, because now many are saying inflation will stay more than a full percentage point above target for at least the next three months, which will in turn force another letter.

But it is not just the CPI which is up. The retail price index soared to 4.2 per cent, from 3.8 per cent last month, but, more, to the point, underlying inflation, that is with food, energy and tobacco taken out, was up from 1.2 to 1.4 per cent.

We all know prices are going up – the tabloids are full of it at the moment, and regular readers of this publication should not be surprised. The writing has been on the wall, or perhaps more accurately in the Office for National Statistics producer prices indices, for some time.

Talking of which, yesterday revealed the latest instalment in the story of producer prices. And once again, the pace is up.

Manufacturers saw prices rise by an alarming 23.3 per cent in the year to April.  As Capital Economics said yesterday, the figures were “nothing short of terrible.”

Manufacturers are in part swallowing their rising costs – but not entirely.  Manufacturers’ output prices rose by 7.5 per cent in the year to April, the highest level since the ONS started publishing these figures in 1987.

So inflation is taking hold. Stagflation is back? Well not necessarily.

As we have said before, the Bank of England can get away with cutting rates providing wages don’t go up in unison with prices. 

This does mean, however, that we have got to take the price rises on the chin.    If we don’t, and expect wages to rise so that we are no worse off, then the Bank of England will be forced to increases rates rapidly.

This is good news for interest rates, and good news, perhaps, for the longer-term, but it is not good for our purses and wallets.  

We have got to sit this one out.  The price of food and oil has got to fall, eventually.  Price is down to demand and supply, and at current prices, demand will plummet. Supply will probably rise too as more resources are put into food production and investment into exploiting alternatives to oil which do not come out of food yields benefits.

The problems we are seeing now have been on the cards for a long time.

The real failure has been a lack of willingness to deal with them.    Now we have no choice.