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Money Morning
The City can breathe easy again.
Inflation has fallen back out of letter-writing territory, and all‘s well with the world once more.
The Bank of England’s target measure, the consumer price index, grew at an annual rate of 2.8% in April, down from 3.1% in March. The pundits are once again proclaiming that interest rates have peaked.
But let‘s just take a closer look at those inflation figures…
What drove inflation lower last month? One of the main impacts was falling gas and electricity bills, as falls in wholesale prices finally feed through to consumers. Another large, and largely unexpected, effect came from the financial sector, where foreign exchange commission rates fell.
The fall in energy bills has been expected for a while – in fact, it’s arrived much later than many analysts originally thought. But what might worry the Bank of England is where the upward pressures on inflation lie.
The biggest upward effect was in clothing and footwear, where prices rose on “most men’s and women’s clothing items”, reports National Statistics, “following the introduction of higher priced replacement stock.”
Food prices were also higher, and restaurant and hotel bills. We’ve written regularly about rising food prices recently – in fact, the current issue of MoneyWeek has a cover story on the topic, looking at the reasons behind food price inflation and how to profit from it – for more, see www.moneyweek.com.
As Damian Reece points out in The Telegraph, “it is still far too early to start celebrating.” For a start, while energy prices may be deflationary at the moment, this cannot be taken for granted. Oil prices, for example, have been consistently higher than expected for some time now, and with hurricane season approaching in the Gulf of Mexico, there’s plenty of scope for storm-induced spikes in the coming months.
More important though is the gradual spread of inflationary pressure to every other area of the shopping basket. “The prices of imported goods are rising at a steady snap, as Chinese manufacturers pass on the higher energy costs they have been incurring to their customers,” says Reece. And their customers don’t mind, because businesses are currently feeling “more confident than ever” of their pricing power.
This is where energy prices can be a double-edged sword in the inflation arena. On the one hand, rising energy prices are inflationary, as they push up costs. But at the same time, they also act as a tax on consumers, sucking up disposable income and squeezing pay packets. So when energy bills fall, people have more money to spend. And given that Britain’s main pastime now seems to be spending, people are more than happy to flock to the shops and hand all that extra money to retailers.
The retailers of course, are then comfortable with raising their prices – after all, they’ve had expensive bills to pay too and are quite keen to claw back some of those energy costs, not to mention rising tax bills.
Despite all this, judging by Mervyn King’s recent letter to the Chancellor, the Bank of England’s quarterly inflation report out later today is likely to be somewhat soothing about the inflation threat. We fully expect the chorus of voices proclaiming that rates have peaked to return, just as they did the last time rates were raised.
Don’t be fooled. Inflation has surprised almost everyone with its tenacity – and now it really is starting to embed itself in the system. If you don’t stamp on it right away, as the Bank has proved entirely averse to doing, then it won’t just go away by itself. Expect some more surprises before the year is out.
Turning to the stock markets…
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In London, stocks were boosted by, but failed to match, strong gains on Wall Street yesterday. London’s blue-chip FTSE 100 index was 13 points higher at the close, at 6,568. Enterprise Inns led the risers after it announced plans to convert to REIT status. For a full market report, see: London market close.
On the Continent, shares were also lifted by the surge on Wall Street. The Paris CAC-40 closed 23 points higher, at 6,049. In Frankfurt, the DAX-30 was 45 points higher, at 7,430.
Across the Atlantic, the Dow Jones soared above the 13,400 mark in intra-day trading and ended the day at a new record closing high of 13,383 – a 37-point gain – as investors were cheered by weaker-than-expected inflation data. However, the tech-heavy Nasdaq and the S&P 500 both fell. The former dropped 21 points to close at 2,525, whilst the latter was was one point lower, at 1,501.
In Asia, the Nikkei recovered from a weak session to close with modest gains today. The index was 16 points higher at 17,529.
Crude oil had climbed to $63.28 this morning, whilst Brent spot was at $67.59 in London.
Spot gold was little changed at $672.10 today and silver had fallen to $13.18.
In the foreign exchange market, the pound was at 1.986 against the dollar and 1.4601 against the euro, whilst the dollar was at 0.735 against the euro and 120.34 against the Japanese yen.
And in London this morning, retailer J Sainsbury announced a fivefold rise in net income to £324m from £58m this time last year. Stripping out a £72m gain related to the company’s pension plan and last year’s one-time charges relating to a computer services contract and debt restructuring, pre-tax profit had risen by 42%. Shares in Britain’s third-largest supermarket had fallen by as much as 4p to 554p in early trading.
And our two recommended articles for today…
Consumer credit: where did it all go wrong?
– Evidence on both sides of the Atlantic suggests more and more consumers are hovering at the brink of insolvency. For more on why lenders allowed their criteria to become so lax – plus what the turning credit cycle means for those who have remained financially secure throughout, click here: Consumer credit: where did it all go wrong?
How to combat market ‘froth’
– One thing all great stock market bull runs have in common: they make people giddy. It’s hard not to get caught up in the excitement with the Dow Jones and other indices hitting fresh record highs. But can investors know when the market’s got a bit too ‘frothy’ – and does it mean that they should get out entirely? To find out how to spot the danger signs – and what to do – read: How to combat market ‘froth’
In London, stocks were boosted by, but failed to match, strong gains on Wall Street yesterday. London’s blue-chip FTSE 100 index was 13 points higher at the close, at 6,568. Enterprise Inns led the risers after it announced plans to convert to REIT status. For a full market report, see: London market close.
On the Continent, shares were also lifted by the surge on Wall Street. The Paris CAC-40 closed 23 points higher, at 6,049. In Frankfurt, the DAX-30 was 45 points higher, at 7,430.
Across the Atlantic, the Dow Jones soared above the 13,400 mark in intra-day trading and ended the day at a new record closing high of 13,383 – a 37-point gain – as investors were cheered by weaker-than-expected inflation data. However, the tech-heavy Nasdaq and the S&P 500 both fell. The former dropped 21 points to close at 2,525, whilst the latter was was one point lower, at 1,501.
In Asia, the Nikkei recovered from a weak session to close with modest gains today. The index was 16 points higher at 17,529.
Crude oil had climbed to $63.28 this morning, whilst Brent spot was at $67.59 in London.
Spot gold was little changed at $672.10 today and silver had fallen to $13.18.
In the foreign exchange market, the pound was at 1.986 against the dollar and 1.4601 against the euro, whilst the dollar was at 0.735 against the euro and 120.34 against the Japanese yen.
And in London this morning, retailer J Sainsbury announced a fivefold rise in net income to £324m from £58m this time last year. Stripping out a £72m gain related to the company’s pension plan and last year’s one-time charges relating to a computer services contract and debt restructuring, pre-tax profit had risen by 42%. Shares in Britain’s third-largest supermarket had fallen by as much as 4p to 554p in early trading.
And our two recommended articles for today…
Consumer credit: where did it all go wrong?
– Evidence on both sides of the Atlantic suggests more and more consumers are hovering at the brink of insolvency. For more on why lenders allowed their criteria to become so lax – plus what the turning credit cycle means for those who have remained financially secure throughout, click here: Consumer credit: where did it all go wrong?
How to combat market ‘froth’
– One thing all great stock market bull runs have in common: they make people giddy. It’s hard not to get caught up in the excitement with the Dow Jones and other indices hitting fresh record highs. But can investors know when the market’s got a bit too ‘frothy’ – and does it mean that they should get out entirely? To find out how to spot the danger signs – and what to do – read: How to combat market ‘froth’