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Gordon Brown must be kicking himself this morning.
If only he hadn’t raised fuel tax in December! The hike in duty was one of the contributing factors to December’s jump in the consumer price index (CPI rose to 3%, the very top of the Bank of England’s target range), which left the Bank with little choice but to hike interest rates this month.
Mind you, a small consolation will be that he managed to be out of the country on the day the inflation figures were announced, leaving the Prime Minister struggling to explain why it was all nothing to worry about really…
With the Chancellor out of the country, Tony Blair was left to try to brush yesterday’s inflation data under the carpet. He has clearly been listening to at least some of Mr Brown’s speeches, because he did exactly what the Chancellor always does – blamed everything on oil.
‘Inflation has risen in most of the major countries because of rising energy prices, rising oil prices, which have doubled, tripled, over the past few years.’
Some observers might have pointed out that the price of a barrel of oil is now at its lowest level in about 18 months or so. They might also have pointed out that the UK’s inflation rate is now much higher than in the Eurozone for example.
They could even have pointed to the fact that – if the Bank was still judged on the old inflation target measure, RPIX (the retail price index excluding mortgage interest payments) – Mervyn King would actually have had to put his ballpoint to paper and write a letter of explanation to the Treasury. Annual RPIX inflation came in at 3.8%, well above the upper limit of 3.5% under the old inflation-targetting rules.
But probably a more important point is that anyone looking at the statistics can see that the big inflation worry can no longer be dismissed as simply being a product of high oil prices. Various economic commentators argued throughout last year that inflation would fall as oil prices eased off. It didn’t, even though the second half of the year saw a relatively stable – if high – oil price.
The latest data shows that just about everything is getting more expensive. A particular item of note was furniture and household goods, which were 11.4% dearer in December than in the previous month. So much for the heavy discounting on the high street trumpeted in the pre-Christmas tabloids – we’re sure the retailers were very grateful for the extra advertising.
The only things that haven’t risen in price over the past year are clothes and footwear (warm winter weather meant heavier discounting on winter clothes) and leisure goods. The rest, from food to school fees to travel costs, has all gone higher.
But the biggest worry for the Bank at the moment may not be CPI, its target measure, but headline inflation – the Retail Price Index (RPI). This is the measure used to calculate increases in the state pension and various other benefits. It rose to 4.4%, a level not seen since 1991. Employees, understandably, prefer to take RPI as their measure when arguing for wage settlements – after all, if it’s deemed as the best way to measure the cost of living for pensioners, then why not for workers too?
And this is the aspect that has the Monetary Policy Committee feeling twitchy. One MPC member, Andrew Sentance, emphasised the fact that the Bank is taking a hard line on wages. ‘If inflation is to be brought back to target and remain there, demand needs to be appropriately restrained and expectations of inflation by wage and price-setters must remain consistent with the 2% CPI target.’
It looks like the Bank is getting its big stick out. In the absence of any very strong excuse to hold rates, like an obvious slowdown in the economy, we really wouldn’t be surprised to see a follow-up rate hike next month.
Whether it will be successful or not in holding back pay growth is another matter – a 2% wage rise now represents anything from a 1% to 2.4% pay cut in real terms, depending on how you like to measure your inflation. And if anyone’s thinking we should all take it on the chin for the greater good, here’s a question – how much of a pay cut do you plan to accept this year?
Turning to the stock markets…
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In London, the FTSE 100 dived sharply lower yesterday as miners, retailers and oil stocks all weighed. The blue-chip index ended the day 47 points weaker, at 6,215, with mining stocks Antofagasta, Lonmin and Vedanta Resources amongst those recording the day’s heaviest losses. For a full market report, see: London market close
Across the Channel, the Paris CAC-40 closed down 39 points on profit-taking, ending the day at 5,591. In Frankfurt, the DAX-30 ended the day 14 points lower, at 6,716.
On Wall Street, stocks closed mixed yesterday. The Dow Jones ended the day 26 points higher, at 12,582. The S&P 500 closed just one point higher, at 1,431. The tech-heavy Nasdaq fell 5 points to close at 2,497, with software firm Symantec weighing heavily as it fell 12% on weak forecasts.
In Asia, the Nikkei closed moderately higher today as investors exercised caution ahead of the Bank of Japan’s decision on interest rates due tomorrow. The index gained 58 points to end the session at 17,261.
Crude oil was trading at $51.49 this morning, whilst Brent spot was at $51.43 in London.
Spot gold had slipped back to $623.70 this morning. Silver, meanwhile, had climbed to $12.57.
And in London this morning, it was revealed that British Gas saw its market share drop below 50% last year for the first time as 1 million customers defected in response to higher bills. British Gas’s parent company, Centrica, has refused to comment until full-year earnings are posted on 22nd February.
And our two recommended articles for today…
The economic effects of US political change
– Do not underestimate the significance of the political shift that has just taken place in the US Congress, says economist Stephen Roach. From a minimum wage hike to increased taxes for the oil industry, there will be profound implications for the economy. To find out what the biggest risks to markets will be, read: The economic effects of US political change
Is it time to get back into Japan?
– With Japan back in the news this week ahead of its central bank’s interest rate decision, you may be wondering whether or not now is good time to be invested in the Nikkei. So why not read our recent cover story – now available to non-subscribers – in which two investment experts give their views on the outlook for the Japanese market? Click here: Is it time to get back into Japan?