Ouch (Again)
More bad news on the inflation front. Perhaps I should just cut and paste last month’s column. Or the month before that. The message doesn’t change.
The Consumer Price Index, the measure used by the Bank of England, was static in August at 3.1%. Yet again it refused to ease below the 3% target ceiling despite falling in each of the previous three months.
I can’t see it dropping far over the next six months and it may well stay above 3%. Economists had expected the rate to slip just below the ceiling last month but regular readers of this column would not have been so optimistic.
Food prices continued to soar, clothing was more expensive and, intriguingly, airlines managed to push their prices 16% higher to offset fuel costs. Air fares always rise in summer but this leap is remarkable given that more Britons were supposed to be staying at home this year.
The Retail Price Index, which includes more items and is more volatile, did ease but only from 4.8% to 4.7%. It remains even further out of kilter than the CPI.
We have more increases coming in the food chain thanks mainly to the shortage of wheat. Clothing and footwear prices will also continue to rise. They are actually lower than they were a year ago but that will soon change. The sharp rise in August was prompted by the rising cost of cotton, exacerbated by the weak pound.
If economists think that a weak currency solves our trade problems then it is hardly surprising that they are consistently wrong on inflation as well.
Debenhams warned on Tuesday that all UK clothes retailers face higher prices. Primark said rising costs may eat into profit margins over the coming year. This is a good time to steer clear of the non-food retail sector, which will surely suffer under an increased strain as households feel the pinch of the economic squeeze.
To make matters worse, retail sales slumped 0.5% in August--it was not a good month for economists, as they were expecting 0.2% growth. July’s growth was revised down from 1.2% to 0.8% to add insult to injury.
Petrol and diesel pump prices have brought some relief, falling for the fourth month in a row. They are still higher than at this time last year, though, and new increases are on the way. The cost of crude has risen $6 in the past month, an increase that will eventually work its way through the system and onto the garage forecourt. The government is due to add a further 1p in fuel duty on October 1, 2010 and the temporary lull in pump prices may tempt the coalition to press ahead with the increase while there is still chance.
All this is well before the increase in VAT to 20% due early in January. Hands up all those who think that inflation will drop below 3% this side of March? Yes, I thought so. Just Bank of England Governor Mervyn King and seven other members of his monetary policy committee.
Even they may be forced to join Andrew Sentance, the lone voice calling for an increase in base rate, before the end of the year. The Bank’s rate is already well divorced from reality as borrowers are paying way above 0.5% while savers are punished with derisory interest. A rise in base rate to 1% would inflict little economic damage and it is better to raise now rather than be forced up more steeply later.
Despite all the warning signs, I still feal that it is too early to talk of a double dip recession. I believe we will plod on unspectacularly for the rest of this year and probably all of next. The good times will not roll until 2012 at the earliest though we should avoid the worst in the meantime.
It is surprising, therefore, that the FTSE is playing with 5,600 points. I don’t expect an outright collapse as I think 5,000 is now secure but I would be reluctant to chase shares higher at this stage. There may be better opportunities before the year is out.
A Present from Santa(nder)
One reason why share prices have held up so well is the absence of any decent flotations to mop up investors’ cash. That could be about to change as Spanish bank Santander seeks to float its UIK operations.
Unlike some of the heavily indebted offerings that have had to be pulled this year, Santander UK will be well capitalised, with a very strong operation making solid profits. It will be boosted by the acquisition of 318 branches from Royal Bank of Scotland to add to former Abbey National, Bradford & Bingley and Alliance & Leicester networks.
No doubt the price tag will reflect all this and there will be the disadvantage of having Santander in control, leaving other shareholders wielding little or no power. It will be interesting to see the details in due course. I will comment on them as soon as they are available.
Rodney Hobson is a private investor writing about his own portfolio. The opinions expressed in this column are those of the individual, and not of Morningstar, and should not be construed as financial advice.
