We all know that prices are falling but last Monday’s Producer Price Index for October gave analysts a surprise. Input prices – for raw materials- fell by 1.00% during the month dragging the annual rate down to 6.8% (remember when it was 30%+). Output prices – finished goods leaving the factory gate – declined by a massive 5.6% in October leaving the 12-month rate at +3.8%. The same factors that forced prices steeply up are those forcing them ever lower; namely oil and commodities. The inescapable truth is that this recession will be global and consumers everywhere will be buying much less. Therefore demand for metals and energy will likewise tumble and the battle now will be between the producers constricting supply and speculators shorting prices. We may find ourselves cheering for the “spivs” after all!
Wednesday saw the release of October’s claimant count figures, unemployment on this measure alone advanced by 36,500. The broader ILO measure showed unemployment advancing by 140,000 over the quarter to September bringing the unemployment rate up from 5.7% to 5.8%. Unsurprisingly average earnings for the quarter witnessed a deceleration; “normal” pay advanced by an annual rate of 3.3% whist the figure increased to 3.6% if bonus payments were removed! Whilst no one receives a negative bonus (and have cash stripped from their pay packet) this differential does suggest that those who received big “city” windfalls aren’t doing so now.
This week sees the all important inflation numbers released which could shift market interest rates significantly lower. Last month the annualised rates stood at 5.2% for CPI, 5.00% for RPI and 5.5% for RPI-X. Analysts are expecting big reductions across the board and dealers may take the view that the declines in employment and both measures of inflation could convince the Bank to cut Base Rate savagely next month. The Committee is already concerned that the key CPI rate could fall, and remain, below target if monetary policy is not eased significantly in the near term. Whilst we thought last week that the Bank would enact a series of ¼% cuts we now fell that a cut on December 5th of between ½% and a full 1% is probable. Expect further significant Sterling depreciation against all major currencies.
