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August saw inflation come in above target and above expectations once again.
Consumer price inflation hit an annual rate of 2.5% last month. Analysts had expected 2.4%. It now looks as though inflation will exceed the Bank of England’s forecasts for the third quarter – and that makes a fresh rate rise by November seem even more likely.
The figures concealed an even more worrying trend. Most analysts have been putting rising inflation down to high oil prices – the continued mantra is that once oil prices stop rising (which they all expected to happen by the start of this year), inflation will fall back.
But petrol prices actually fell compared to last year – in fact transport costs exerted the biggest downward effect of all on last month’s inflation figure.
The real problem was every central banker’s biggest nightmare – stronger shop prices…
UK consumer price inflation is back at its highest level since Labour came to power in 1997. It has hit 2.5% only twice before during that time, in July this year, and September 2005. If it breaches 3% (or goes below 1%, for that matter) the Bank of England has to write an open letter to the Treasury explaining why.
The Bank’s previous target measure – the RPIX (retail price index excluding mortgage interest payments) hit 3.3% in August. That’s just 0.2 percentage points away from the 3.5% level that once would have had Bank Governor Mervyn King reaching for his pencil sharpener.
The unexpected surge was driven primarily by the rising cost of computer games, but higher prices for furniture, clothes and shoes, and food also contributed heavily. The data adds to recent evidence that retailers are starting to regain ‘pricing power’ – in other words, they’re becoming less wary of passing rising costs onto consumers.
That’s a worry because rising shop prices suggest that ‘second-round effects’ of soaring energy and raw materials inflation are finally seeping into the economy. As we’ve mentioned time and again, when shop prices rise, people start to expect their wages to rise to match them. If wages rise, companies hike prices further to cover the costs, and so on.
This all points to another interest rate rise. But most analysts were already expecting another hike in November. So it strikes us that there’s a good chance the Bank may even pull it forward a month.
The main reason to wait is because November sees the next publication of the Bank’s quarterly inflation report, which is normally when rate changes are made because the rate-setting committee has an up-to-date forecast of where it thinks inflation is headed.
But if a November hike is a dead cert anyway, then Mr King and his colleagues may feel a rise in October is justified. If that seems to do the trick, they could forego the November rise. But if inflation keeps surprising on the upside – as it persistently has – the Bank has the space to keep raising at a more leisurely pace in the run-up to Christmas, rather than causing panic by going for a half-point rise.
All of this is bad news for homeowners, of course – particularly those hard-pressed first-time buyers who have been sold 30-year interest-only mortgages by advisers who swear to them that ‘renting is dead money’ (interest payments are ‘dead money’ too, by the way – unless you happen to feel that contributing to your bank’s profits is in some way a far better thing than giving money to your landlord).
A survey for Citizens Advice warns that 1 in 25 homeowners missed a mortgage payment last year – the figure increased to more than 1 in 8 for first-time buyers under the age of 24. The charity said it has dealt with 51,000 queries about mortgage arrears and arrears on debts secured against homes in the past year. According to The Times, “Officers say that they have not seen problems on this scale since the last recession in the 1990s.”
As the paper’s leader column on the same subject puts it: “Debt is now so ubiquitous that it breeds a certain complacency. If everyone is doing it, goes the thinking, it must be all right.”
But unfortunately, it’s only all right while the times of easy credit last. And as interest rates keep rising, there will come a point where the banks suddenly panic and realize that just as they were too slack with credit card lending back in 2004, they’ve now gone far too easy on mortgage lending. And that means a lot of people are in for a serious shock in the coming months.
Turning to the stock markets…
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The FTSE 100 had a brighter day yesterday – boosted in the afternoon by the strong start on Wall Street – and closed 16 points higher at 5,876. Miners narrowed their losses, but Kazakhmys, Rio Tinto and Lonmin remained among the top fallers. Carnival was among the day’s biggest gainers as the relatively low number of hurricanes this year attracted buyers to the cruise operator. For a full market report, see: London market close
On the Continent, the Paris CAC-40 ended Tuesday 67 points higher, at 5,125. And in Frankfurt, the Dax-30 was up 75 points to 5,973, with the gains led by tech stocks.
On Wall Street, stocks rallied to take the Dow Jones Industrial Average to its highest close in four months, up 101 points to 11,498. The tech-heavy Nasdaq ended the day 42 points higher, at 2,215 and the S&P 500 closed 13 points higher, at 1,313. Low oil prices and strong results from Goldman Sachs boosted sentiment.
In Asia, the Nikkei 225 fell back from earlier highs to end the session 30 points higher, at 15,750.
The price of crude oil had fallen again this morning, last trading at $63.63 a barrel. In London, Brent spot was down over 1% to $62.07.
Spot gold last traded at $583.25/oz, having rebounded from yesterday’s lows.
And in London this morning, weapons maker BAE Systems announced a first-half profit increase of 28%, beating analysts’ expectations. Profits were boosted by orders from the US military for Bradley vehicles used in the Iraq conflict. BAE’s share price had risen by as much as 4.5p in early trading.
And our two recommended articles for today…
What every investor in mining stocks must know
– If you invest in mining or exploration stocks, it is essential you understand the reserve and resource statements released by companies. To find out how can you make the most money from your investments – and avoid scams – read: What every investor in mining stocks must know
Why we must take Peak Oil seriously
– Energy expert and pioneer of Peak Oil theory Dr Bakhtiari believes that oil production is entering into a new era. At what point will demand begin to exceed supply? And how rapidly will output decline? For the answers to these questions and an outline of the ‘four stages of transition’, read: Why we must take Peak Oil seriously