The Bumpy Road
The release last week of April’s producer price index, consumer price index, unemployment and earnings figures caused dealers to reappraise their views of the direction of both market rates and Base Rate. Inflation at the factory gates achieved new records; input prices rose by 2.4% in the month and 23.1% for the year whilst output prices rose by 1.4% and 7.4% respectively. The main culprits were again oil – up 62.6% in the last 12 months - and UK sourced foods up 32.3% for the same period. Consumer inflation rocketed past the predicted annual rate of 2.5% to post a 3.0% gain, the monthly figure was 0.8%.
Interestingly though, average earnings advanced by 4.7% for the quarter to March whilst claimant count unemployment grew (for the third month running) by 7,200. At first glance the average earnings number may suggest that we are actually paying ourselves more to compensate for price increases and if this is the case then actual inflation will advance. However, when bonuses are stripped out the actual gain was a more modest 3.7%, which is close to the average of the last 12 months. According to the ILO unemployment advanced by 14,000 for the quarter to March. Taking all the numbers together it looks as if we are still unable to make good the shortages in our domestic budgets and so the reality is deflation. We have less money to spend on non-essential items and so the ability of retailers to pass on their price increases will be severely limited.
According to the Bank’s Quarterly Inflation Report, CPI will advance to between 3.5% and 4.00% in the next 12 months before falling back towards the 2.0% target in 2 years. Merv re-stated his belief that the UK economy is headed for a bumpy period but monetary policy should not prevent this readjustment. He added that he fully expects to have to write his open letter to the Chancellor several time in the next 12 months. In reality, the Bank cannot use Base Rate to combat commodity price inflation, however the Bank is not going to cut rates aggressively just to defend the housing market. So we are exactly where we were last week.
18 / May / 2008