Inflation is back with a vengeance. No wonder Bank of England Governor Mervyn King cuddled up to the new administration, praising their debt reduction plans. He has had to write a letter of explanation on inflation to Chancellor George Osborne.
We have had one or two nasty shocks on the inflation front over the past year and this ranks among the worst. The consumer price index, the government’s preferred measure (or, at least, the previous government’s preferred measure) jumped from 3.4% to 3.7% in April, topping the 3% ceiling for the third consecutive month.
This is the less volatile measure--the retail prices index which includes housing costs leapt from 4.4% to 5.3%.
King’s argument that this is a blip before inflation comes down to the 2% target is looking ever more threadbare. He blames higher VAT, petrol prices and the weak value of the pound for the latest aberration.
The VAT increase in January will affect the figures for the rest of this year. The high price of fuel will feed its way through into the wider economy for months to come, likewise the weak pound.
I have banged on ad nauseam about the dangers of inflation. We cannot rely on weak wage pressures--up on average 1.9% in the year to April--to keep inflation down. This is the other side of the weak pound: we cannot rely on exports to remain cheaper for long because the higher price of imports such as raw materials and fuel will erode the differential.
I still feel we will have a small increase in base rate before the year is out, and possibly as early as June. This would sound a warning shot without choking off economic recovery, since lending rates are much higher than the official rate anyway.
We might then see a small rise in interest on savings accounts, which is currently miserly. However, it is clear that saving in a bank or building society account is not worth the candle even with a minor increase. Banks are too busy rebuilding their balance sheets to worry about the customers.
Keep buying shares on the dips in the FTSE 100. It’s a better bet than savings accounts.
In the Right Direction
It’s been a long slow haul for building products supplier Wolseley but the shares have clawed their way back from a low of 500p to topside of 1,500p and it may not be too late to buy, although it will be a long time before they get back above £50, where they were three years ago.
Once a stock market darling, Wolseley came a cropper in the sub-prime scandal as all its markets fell apart together. That was a shame because Wolseley had operations in the UK, Europe and the US and it supplied products, mainly but not exclusively heating and plumbing, for residential and commercial markets and to professionals and do-it-yourselfers. You can’t say the company had failed to diversify its markets.
As the shares tumbled through 2007 and 2008 I criticised Wolseley management for being slow to react and I think it is fair to complain that the American management should have seen that all was not well before the storm broke--or perhaps being human they saw what they wanted to see.
However, there was a clear turning point in November 2008 when Wolseley announced a range of measures including a placing and rights issue to raise £1 billion to reduce debt from £4.3 billion. At the same time it signed a two year debt agreement with five banks to put the group on a stable footing.
Secondly, Wolseley planned to cut back on poor performing parts of the business and concentrate on the better prospects such as the core businesses in the UK and Ireland, Scandinavia and France plus plumbing and heating in North America, where it had sufficiently large operations giving good returns. No more cash was to be ploughed into expansion in France until the financial performance there improved.
A strategic review was to be launched into the Central and Eastern Europe business while the rest of the US business was to be sold or put into a joint venture. This was Stock, the second largest provider of building materials and construction services to professional home builders and contractors in the United States. It had proved particularly vulnerable to fluctuations in lumber prices. The spin off has since been achieved.
Although Wolseley’s markets have continued to be difficult the news has gradually improved. In its latest management statement it says that revenue was down in the three months to May 30 but profits were higher and trading profit doubled. Particularly important is that net debt is down to £1.1 billion and falling.
Read Morningstar equity analyst Anthony Dayrit's take on Wolseley's recent results here.
Lucky For Some
If you want to know why the banks always bounce back, take a look at the whopping fees that are being charged by investment banks for ‘helping’ Prudential with its daring/transforming/risky/potentially disastrous takeover of the Asian assets of AIG.
Advice plus underwriting fees are running out at well above £1 billion on a £24.5 billion deal. It means that more than 5% is being added to the cost of the purchase.
Nothing I read makes me feel anymore enthusiastic about Prudential. But it does make me feel increasingly bullish about the finance sector.
But It Is Taxing
Tax, we are told, doesn’t have to be taxing but it does seem to tax the taxman. Before the end of the financial year in April I received three letters from HM Revenue & Customs all with the same date and arriving in the same post.
One from Glasgow gave me a tax code for 2010-11 that looked right. Two from Edinburgh had two different codes. Ominously, one claimed I owed more than £500 tax and my coding was set to recoup this over the following 12 months. This letter said that I ‘may remember us telling you about this before’.
No, I didn’t remember. It was the first I had heard of it. I fill in my tax online and this showed I owed 50p, which I did not have to pay immediately as the amount was so small. It was, naturally, a waste of time ringing the 0845 number on the form as no-one answers so I confirmed with the online helpline email service that I did not owe £500 and wrote to Edinburgh pointing this out and asking what year the supposed outstanding amount referred to. Silence.
Now I have three forms, again all with the same date and arriving together. One from Bootle is fine but again there are two from Edinburgh with two different codings, one still claiming unpaid tax.
As far as I can see the problem will eventually resolve itself when I submit my annual return for the financial year just ended and for the current one in 12 months’ time but if anyone out there can suggest what one can do without making expensive phone calls I will be interested to hear about it.
You Can Bank On It
Why is it that now everything is so much easier to do, it is so hard to get anything done? I wrote to ‘customer services’ for my NatWest credit card well before it was due for renewal asking for it to be cancelled as I did not wish to continue paying £100 for a once valuable card that had, over the years, had all its benefits stripped out one by one.
I asked for written confirmation that my wishes had been carried out and on receiving no response wrote again. As the deadline loomed I rang the card centre and was told that a note had been put on my electronic file not to renew and that the file had gone to the relevant department so I chopped up the cards.
Now I get my monthly statement showing the card has been renewed and £100 will be charged. I ring up to protest and this time I am told that the card cannot be cancelled through the card centre, it has to be cancelled through the branch.
As I live some distance from my branch I rang the number given on my bank statement but this is another call centre, not the branch number itself. I am told that the card cannot be cancelled over the phone unless I can give my Internet PIN. This is a little difficult as I have never had one and have never banked online. The call centre refuses point blank to give me the branch’s real telephone number so I ask for the branch to be told to call me. Nothing happens.
So I have had to write to the branch, but I know from a previous experience that most letters to the branch are intercepted and sent to a regional centre, no doubt to the same people who won’t deal with me over the phone unless I can provide a non-existent number. I shall therefore have to make a special journey to get to my branch in bank opening hours.
