Epochal change in our economic situation

What are the epochal economic changes in my lifetime?  I'm no student of macroeconomics, as any reader here will know, so I don't have a ready list.  The rise of China comes first to mind, along with its concomitant, the (relative) de-industrialisation of the West, and its precursor, the collapse of (left-wing / doctrinal) communism.  The oil crises of the 1970s.  Economic migration towards the West and the suppression of labour costs.  And ... economic "neoliberalism"?  The period of the "great moderation"? - maybe.  The banking crisis 2007-09? - not really: what changed?  Any others people care to nominate?  [I'm not looking for lists of new technologies here.] 

Anyhow, now we have a serious new candidate: the Keynsian turn of Germany announced just days ago, which is probably just the cornerstone of the EU letting rip, as many in the EC and several member countries have wanted to for decades now.  So much latent borrowing power!  Assuming it actually happens as presaged, expenditure on weaponry (of course) but also infrastructure, stands to become a truly massive boom, with the added twist that there could be a strong strategic reluctance to outsource all this upsurge in manufacturing and construction to China.

The markets don't think it all looks so obviously great for the USA, either: are we seeing the turning-point in a 25-year bull run on the DJ, and maybe early suggestions of the USD going out of favour?  US recession, even, as the tariffs bite?  Nice one, Donald - though at least there will be plenty of ongoing demand for his natural gas.  

Writing as a non-economist, I'd say that the whole thing also sounds rather inflationary, too - for all of us.   The older I get, the gladder I am for my substantial inflation-hedge. 

What do we all reckon, at this critical juncture? 

ND

PS - did you notice the Irish offered themselves as part of the Macron/Starmer coalition of the willing?!  See, this is real ! 

Banking Crisis - again ...

Commodities down on banking stress

Here at C@W we pride ourselves on having spotted the "2008" banking crisis in the summer of 2007, when two German banks went down, followed by Northern Rock - all three being canaries in the dank, dirty coalmine of culpably fatuous and irresponsible banking strategies being practised deep underground, that turned out to be systemic.

So what's happening now?  It doesn't look good.

• Silicon Valley and Signature
• Deutsche Bank (again) and Credit Suisse
• risk to economic recovery due to reduced bank lending
• likely response of the authorities: back to QE! (interest rates coming off already ...)

Thus far, the current banking woes have been accompanied by a pronounced downtick in commodity prices.  If, on the basis of economic contraction, that persists then maybe inflation doesn't just take off again with QE ... and people are forever pronouncing on the Chinese property market ... but I'm no good at predicting these macro phenomena.  (What's more, I don't know who is.)  Are you out there, CU?!

ND

Truss' energy package: unintended consequences ahoy!

It's a bit difficult to be definitive on the new PM's 'energy price guarantee' package, because "details are awaited".   The Funeral is the pretext, but actually of course they're making it up as they go along.

So: politics first.  She has to do something extraordinary, or she'll be defenestrated by poll-tax style riots before Xmas.  As has always been the case, announcements like this shut Starmer up immediately - he never knows what to say.  All the commentary has essentially been technical, save for a little peep of "it's not progressive - the wicked rich benefit too": true, but since all eyes are on the Bier, that's not getting any traction.  

We might also note that Truss obviously considers it politically unacceptable to announce any form of rationing.  it's gonna happen anyway (and we know the Grid already has the power to do it unilaterally), so I think this mealy-mouthed cowardice is stupid.   The time to ready the populace for what's to befall is right now, as Macron is doing quite purposefully.

As regards the economics, not that I'm your man here and we look to CU for more; but quite obviously, in the short term the package does almost nothing to increase supply, and not much that I can see to curtail demand (no mention of rationing or compulsory reductions in usage).  So the fundamental issue - i.e. this is a genuine (if artificial, as regards Putin's actions) global supply crisis - is being glossed over:  it's been decided the state will underwrite whatever the energy is going to cost.  So the first big takeaway is: cost-push inflation will go roaring on.

What about spontaneous demand-side response?  Industry will certainly retreat in the face of even the newly capped level of price it's paying: some of this might be in the shape of a bit of efficiency, but mostly it will be outright demand destruction (or 'demand export' - to N.America, which won't be suffering so badly).  Likewise, even at the capped level, which is 'merely' twice last year's rather than three times, residential energy consumers will definitely use less.  I don't think anyone knows by how much domestic demand will fall - some of it has historically been totally inelastic, but we may find that changes.  Again, some of this will be efficiency (and putting on a jumper) but for sure, problems of illness and damp will arise over time.  The housing stock won't benefit at all, and nor will sickly people.   

All that said, my best guess is that rationing will still be required, certainly if anything like the Beast from the East (meteorological beast, that is) comes along, or even its small brother.  This is an outright, absolute energy commodity shortfall, with Europe being as badly affected as any region.

I'm disinclined to bang on about too many of the details just now, because we await so many more.  Likewise, the longer-term aspects (North Sea licensing, fracking, nukes) designed to improve supply are for another day, in every sense**.  I will say, however, that there is to be a 'commercial' strand of activity undertaken, as Truss favours buying out the generating sector windfalls with secure long term offtake contracts (on a voluntary, negotiated basis!) instead of windfall-taxing them.  This is really stupid, in my judgement.  Any ideological resistance to windfall-taxing has long since lost its virginity; and the idea that the civil service is up to this 'commercial' task flies in the face of all experience.

Jury is out: but on this and indeed the whole complex package, I'm not even slightly confident a Truss / Kwarteng government is up to the task either.  It's just so big.  As is the parallel EU effort, by the way (and over there, it's very fraught politically, too: and their grasp of how markets work is really awful).  In both cases, there will turn out to be equally big gaps; and overall, the unintended consequences will be legion.

ND  

_______________

** ditto the global aspects of the crisis, of which there are many

When Does Inflation Hit? Bank Holiday Post

Returning from a Bank Hol run on the supermarket, I cannot but notice that the much-heralded inflation (as anticipated by myself, amongst many others) has not yet hit food prices - at least, not the stuff Mrs D and I buy, across a wide range of foodstuffs and drinks.  Not even the stuff coated in sunflower oil.

We are given to believe supply chains are heavily oriented towards just-in-time, which speaks against there being many months of last year's produce stashed in Mr Tesco's warehouse, being steadily run down.  The warehouses of his suppliers?  Some of what's in our trolley is fresh produce.

And everything requires transportation: do supply-chain players buy their fuel many months forward?  I'd believe they fixed their electricity and gas prices around this time last year, which was when every energy professional knew the price crisis was coming, Ukraine or no Ukraine.  But diesel?  Ships' bunkers?  Maybe.

Or is everyone determined to take the hit in their P&L?  Is it even a "passive price war"?

All in all, I'm surprised.  When does the absence of wheat (& sunflower) exports from Ukraine - and Russia - make itself felt?  When do supply-chain players run out of forward-purchased energy?  

When does food inflation hit?

ND

PS:  Food aside, I'm not sure I've encountered the full out-working of >6% CPI generally, either ...

PPS:  Food price inflation has gone through the roof in, errrr, Russia ...  One of our new trolls can now assert this is CIA propaganda if they like, but, hey-ho, it's true. 

When Do The Bread Riots Start?

A more than usually speculative post ...

Last week, the price of petrol went up noticeably (~3%), but for me even more significant were increases in the prices of milk at Tesco (5.5%), and - highly symbolic - the brown bread we favour (12.5%). 

Historically, British bread riots were when the price of a loaf went up from, like, 4d to 5d.  So we're halfway to that kind of increase.  In France, received wisdom is that Les Gilets Jaunes kicked off as fuel-price rioters.  There's nothing I can see that will do anything to reverse the current inflationary trend - in fact, quite the opposite.

When does modern British man/woman hit the streets over the cost-of-living?  And - will it be before or after the 'personal' costs of Net Zero Carbon hit home in a really visible way?

I put it that way because this week saw the launch of the fat government document purporting to be its Net Zero Strategy (alongside a distinctly, nay frostily skeptical Treasury document on the same theme).  Ordinarily, as part of our service to readers I undertake to review these things systematically; but this time there's no point.  The main strategy doc is so full of numerical nonsense and indeed internally contradictory numbers, it's an outright embarrassment - are there any Civil Servants left with an ounce of pride? - and can only be taken as something for Boris to wave at COP26.  (He'd have done better to stay with the highly complimentary assessment of the UK in a review from "Climate Transparency"  [one of those proliferating green NGOs] which has us as by far the best performer of the G20 nations - out on our own in a category of one.)  However, one thing is really clear: big costs are on their way.

In one very obvious scenario, COP26 could be a PR disaster.  It took a lot of effort to prevent the same outcome at Paris '21, when host-nation France was putting in 120% diplomatic effort and had a lot of other big nations onside anyway.  Doesn't look particularly auspicious for Boris right now, although Kerry, the EC (if not all euro-nations) and the UN apparatus will be more than a little helpful to his cause.  Crazy promises of cash might be forthcoming to work the trick.  On the other hand, stay-away Xi might put in a dramatic appearance and engineer himself into the position of being 100% pivotal: "either acknowledge me as the saviour of the world, or I pull the plug".  Who could be surprised if COP26 ends in fiasco, with the 'developing' nations stomping out due to their pockets not being adequately lined with gold; then Xi summons the developing world leaders to Beijing for an early Xmas present?

Anyhow, unless Boris engineers a half-triumph for himself, I reckon he's gone before Easter.  Then Rishi can announce the resumption of fracking, etc etc ...  Oh, and deal with those bread riots.  What a good job there's currently no Leader of the Opposition.

Have a great weekend!

ND

Stagflation - umm, how?

All the comment in the media around the world today is of the coming stagflationary scenario and a return to the 1970's. 

Even at a high level I just don't get it - this is another case of journalists and commentators latching onto something they don't understand and cant be bothered to apply in a few minutes thinking into. 

The key here is the stag piece - inflation is a given as we have a global energy crisis. Longer term this seems to be really quite well under-pinned by a lack of investment in real energy and an over-reliance on renewables fairy stories far ahead of the real supply curve needed. 

This will make Putin and MBS very happy for a long-time to come, even Venezuela might be able to pay some of it bonds and Iraq bribe its way out of civil war. 

Anyhow, the first part of stagflation is a slowing economy. This feels like a very unlikely outcome of a huge bounce back from a lockdown of the world economy due to the pandemic. The idea that there won't be growth does not chime with activity in the UK now, where people are busily spending their enforced savings wherever they can. Town centres are heaving, leisure and retail surging. 

The only thing that would kill this off is a massive stock market crash that hammered sentiment. This is a hard thing to engineer when interest rates are zero-bound and the Fed prints money liberally to feed the system. Admittedly, there will come a time in the next few months when interest rates will have to rise or QE can be cancelled (a longer post on this is overdue) to reduce the impact of inflation. However, real inflation caused by energy price hikes wont really be impacted by higher interest rates - it is not financial inflation after all, but input prices. Lower currency will be a negative too in this scenario. 

However some reckless governments will see this as the easy way out of 150% GDP borrowing, with a few years of high inflation stopping all that painful austerity which instead can be meted out democratically to everybody and blamed on markets and foreigners rather than Government policies. 

So, anyone saying we will see stagflation must really be saying they see a huge market crash coming as the precursor - yet few seem to mention this.

Energy crisis continues - where is the clamour?

If anything, I am amazed at how little the energy crisis is hitting home. Gas prices are 200% up and this means that we will shortly be paying well over 100% increases on our domestic bills. So much for keeping a lid on inflation, this alone will drive inflation to over 2% per annum without any other factors. 

It still seems to be just a business news page issue, the petrol shortage, although energy for transport is seen as something different. To be blamed on Brexit or the pandemic as per your choice. 

The energy crisis has none of these factors. The Government is 100% squarely to blame over the last 10 years. Cutting gas and oil stations too quickly, not replacing nuclear and then over-relying on Wind and Solar when they are not fit for core supply with the current lack of battery capacity. This is before we get to Nick's post of the lack of gas storage. The whole of Europe is suffering the same issues. 

How these costs work themselves out will be both interesting and horrifying. Costs and prices will go up as input costs are hugely increased - no both wages and energy. Countries, cough America, with domestic supply will have a huge advantage for the next few months. China is struggling, rationing power all over the place where it can. 

Why the media and opposition can't see what a hole the Government is in over this and one which for which there are simply no short term answers.

Time to switch off

 I really mean it too..

Check this story out - a very well written piece in Bloomberg that actually factually summarises all the relevant key points at hand. 

Due to no wind, there is a 10% gap in energy production in the UK this week. France has many of its nukes off-line, so we rely on back up coal and gas. Right at the point where global supply chain issues mean that prices are soaring.

And I mean soaring, one contract on Monday went for £1760, as opposed to the usual £50 per KwH. The average a mere £345 - just a seven-fold price increase for the week. 

Of course, the wind will blow again, but there is no way this episode does not lead to markedly higher consumer prices over the winter. Cold spells in winter now are going to cost the wholesalers even higher prices than this as supplies of gas are so tight. 

As such, time to make sure you turn of unused plugs around the house and look to limit consumption where you can. My rough guess is electricity prices will double over the winter at a minimum from where they are now and stay that way for a while. Worst case will be 3x or 4x the price in January.

Hello, is that inflation I see coming down the road at speed?

Inflation Edges Ahead. Or Not

We keep having this debate, don't we?  Raging inflation just around the corner - or merely a knee-jerk reaction based on misinterpreting various straws in the wind?

Well, today we learn that Eurozone CPI has hit 3%, a ten-year high.  Aluminium is way up, along with most of the supply chain for building stuff (notably, 'green' stuff).  Oil has come off its July peak, but natural gas is actually quite scary.

Then again ... we seem set to be importing a whole new wave of cheap labour.  The day that the Unions long for, when the Brexit / Covid labour shortage** really kicks in and transforms the relationship between capital and labour, never quite seems to arrive.

And people are repaying their mortgages.  And CU is away, so we can't even ask him.

Maybe we should have a compo:  UK CPI for December 2021, anybody?

ND

___________

** Earlier this month we did a short west-country tour, during which we patronised 7 establishments (hotels, restaurants).  Didn't hear a single non-Brit voice amongst any of the staff.  Wouldn't have been able to say that three years ago.

Bank of England - What inflation?

 So as we see record rises in inflation and to continue Nick Drew's theme some key elements are being ignored...

There is a much wider theme at work, there is a huge shortage of computer chips due to raw materials shortages. The big issue is the change in demand with cars now needing more chips as well as phones and most things electrical - the supply chain for the near doubling of demand is going to take a couple of years to fix. Plus China, as ever, interferes where it can with raw materials and supplies to Taiwan which is the home of much of the world's chip production (recent military manoeuvres too on the China side of the Taiwan strait are fund too....).

So used cars, used computers etc are all seeing huge bump in price, as are say new cars which are limited in number. 

Against this background, the Bank of England issue another £1.5 billion of quantitative easing this week to try to get the UK economy booming again.  Err....excuse me? Wage inflation is at over 5% this year, supply of goods is restricted. There are only two outcomes.

Stagflation - inflation but little economic growth or just plain old inflation with higher wages and prices in a spiral. 

The genie is out of the bottle, last time this happened, it was 20 years to get it back in. Plenty of time over the summer for us to reflect on how this will impact the Economy, markets and Government. 

Inflation (part 94)

Not for the first time this year, I can't help drawing attention to surging energy prices:  they are continuing strongly.  Wholesale gas in Europe has doubled (sic) in the past 4 months, with electricity, coal and carbon rocketing also.  I don't recall anything quite like this since oil went to $147 for a nanosecond in 2008.

The recovery programmes are starting to kick in.

Post-covid wages are obviously under huge upwards stress in many sectors.  Catering staff can't be found, as any trip to the pub / restaurant / hotel will readily confirm.

Where on earth is this heading?   Very uncomfortable for some - even the triple-locked pensioner might be queasy.  Sunak has balls if he seriously proposes to short-circuit that.

ND

lnflation doubles in a month and jobs impact this may have

 Continuing on from yesterday's excellent comments. Today we have seen inflation reportedly rise from 0.7% to 1.5% inside a month. None of this is unexpected, big drops from a year ago when commodity market crashed are coming out of the figures now as prices rose again quite quickly into April/May 2020 after the Feb/March dip. 

Also, as touched on yesterday, we are seeing wage rises come back into play. The missing million of working age population who left post-Brexit and Coronaplague can't come back yet. So now businesses are looking forward, there is a big "war for talent" as the HR-types like to say when they are feeling pseudo-intellectual.

At the same time, there are plenty of people not very keen on going back to the office, especially senior quite well paid people who are likely more productive without commuting thrown into their days. What do companies do in the short and medium term? These people are paid London level salaries but could now live in Wales in theory. That surely won't last. Commuters who had to pay for season tickets just had a £4000 bonus last year. Equally, for more junior staff, they need the senior people to learn their skills from which does not happen so much over Zoom. 

My take on this is a hybrid model will out, where actually yes you might live further from London and only come in 2-3 days a weeks, but senior jobs will not really be allowed to be full remote in the longer term and if they are, they will be deemed specialist and not senior - thereby changing the pay over time for that role. So this will allow things to continue in a not dissimilar way to now. 

At the moment, companies have too much to deal with sorting out return to office, planning new office spaces, working in a newly busy market, trying to hire poeple etc, to really absorb any of the long-term lessons - which is why we see such divergence with HSBC saying most can work from home and Goldman's saying none. 

Of course, this is a very South-East centric post, in the rest of the Country people generally did not live 80+ miles from work and so this is less of an issue, plus there are of course most actual jobs, which did not cater for the WFH world anyway.

One thing that leaves me cold is that somehow, this will all lead to all jobs going to India etc. adn that flexibility is a path to hell. "People can work from anyway so why not hire them where they are cheapest" and so careful what you wish for. If this were true it would already have happened (indeed it did, hence China), the new element is only that companies have realised they can survive more flexibility now, not that they need a whole new cheap team. The conundrum remains how do you fairly reward/price flexibility as an offer to your staff given it has big upsides for them over the company - but to go back to my earlier theme, in a war for talent, flexibility may just end up a priced in benefit for now.

Inflation Ahoy (?)

Ever since QE was invented, some folks have been predicting inflation and others deflation.  Anyhow, back in January I commented (BTL here) that energy prices were stirring, led by gas and the Far East's insatiable demand for LNG cargos that would otherwise be available for Europe.  

A very mild March dampened this down a bit, but it's roaring away now, to the extent that this week, forward prices for this coming summer in Europe are only a fraction below forwards for next winter.  You might guess that is quite unusual for a very seasonal commodity like gas.  You'd be right: it's really remarkable.  (BTW, the fact that next winter's price is relatively low doesn't represent any kind of comfort that easier times are ahead.  Say after me: "a forward curve is not a forecast ...")

What's going on?  (a) Absolute demand, especially in the east; (b) Russia / Gazprom is playing silly-buggers, holding back supply capacity they could easily fill.  Why?  Because the are reminding the Germans, none too subtly, of where their energy comes from, pressuring them to resist US sanctions on Nord Stream 2.

The prices of oil, coal and carbon allowances are steaming ahead, too (and therefore electricity).  Is this destined to continue?  Well, Russian tantrums come and go, so the parochial matter of European gas supply can ease at the drop of a hat.  And the dreadful situation in India suggests that Covid may yet bring GDP-wrecking times ahead, offsetting the strong Asian bounceback from a year ago.  So who knows?

But when Biden's trillions start hitting the economy, on top of China's regular growth, the demand for steel and concrete (and copper, and ...) should boom.  Covid vs Concrete ... who knows?  You thoughts invited below -

ND

Are wild markets a late stage symptom of the policy disease?

 When can we be rid of this virus? No, not Covid, the Federal Reserve. 

Yes, I know, you think I am about to enter a conspiracy world of who owns the Fed and how it is all some cabal of Jeremy Corbyn's deepest and closest friends. 

Well, sorry to disappoint, but instead there is a huge story here. When Tesla fell on Monday 20%, erasing in truth only a month or so's gains, Bitcoin fell in sync. Suddenly, Jerome Powell, chair of the Federal Reserve, decided to remind the markets that the Fed would not remove the trillions of excess liquidity from the economy anytime soon. The liquidity is a feature, not a bug of the current system. 

The same is the case with our own Bank of England, but we have not had a huge run up in share prices and other assets like the US. Here, Government debt has easily absorbed all the extra debt created by the Central Bank. 

In the US, we are seeing crazy wild markets. Bitcoin and other digital currencies are hitting all time highs, SPAC's (Special Purpose Acquisitions Companies) are literally raised like South Sea bubble entities - "for reasons for which no one is to know the purpose." Sadly, I see the FT and lawyers etc rushing to promote shell companies in the UK and to try to get SPAC's registered here. 

SPAC's are a sign though, as are the crazed valuations of a few successful stocks. There is not much to invest in and there is far, far too much money chasing it. Private Equity sits on its largest amount of 'dry powder' - money raised but not deployed, ever. This is getting put into SPAC's to 'deploy' it but really it is just moving around savings and charging fees to the investors. 

With the markets the way they are, the underlying economy is in a wild phase itself with Covid smashing some sectors and boosting others. Forcing technology change in a year that would have taken a decade before. 

Central banks have created this monster and Governments love it - after all for them it is the magic money tree come true. Massive extra spending and no inflation. If inflation comes about then it is easy to cancel the fantasy QE bonds so goes the Central Bank theory and reduce money supply.

See below for what we are really doing though - a huge currency debasement strategy with apparently limited inflation impact. 

I am thinking hard on how this ends. In 2006, a huge run up in credit and debt ended in Great Recession, which was entirely predictable for 2 years beforehand. Here we see the Central Banks juicing the market and Covid providing both the spark but also the cover. My base case is the blow off phase lies ahead of us still - perhaps after another run up of asset prices. In reality the end phase must be some serious inflation or, if the Central Banks execute on slimming their balance sheets, huge deflation and bust. Either way, it is not a happy ending. 

UK Inflation falls again

Back down to 2.5% today.


I wrote last week of the challenge the Bank of England will have in normalising the economy and this is yet another example of this trend.


Historically, to maintain a 2.5% inflation rate you would have expected interest rates to be at around 4% to 5%. But now, after the financial crash, this just is not the case. Debt loads, both public and private are much higher (excluding the Banks whose balance sheets are around 50% smaller). This higher debt load means we are far more sensitive to interest rate changes than pre-2008.


The oft use quote is "this time its different" - but in many ways this time it really is, the macro-economy seems very resilient inspite of the underlying monetary failure of the State. Unemployment is very low by any historical standard, inflation  - even including house prices - remains low. The Government is glacially eating into the deficit. Even the Pound has recovered, which is a shame in many ways as it was such a boost to the sluggish economy of 2017. Abroad the Trump stimulus will help the US a while and the EU is climbing out of its decade long crash - albeit with some major challenges ahead in Countries like Italy that avoided fixing the banking systems.


As a backgound the, how can the Bank of England continue to raise rates in anything other than a tiny and anemic way? Also, more worryingly, is should anything go wrong with the current goldilocks scenario we are facing prolonged deflation with very few tools left to counter it.


Amazing really the Government, for all its evident crapness of people and policy, has still managed to oversee a good economy amongst the madness its manifest failings elsewhere.

UK Inflation falling - not for me!

This was quite an interesting find. I was going to a a post on the CPI inflation basket, although actually CPI and RPI are pretty close in correlation this year - with RPI being a little higher but moving in line even given housing prices and lending going up. With Help to Buy early next year, this correlation will probably start to widen.

What I did find though was this personal inflation calculator which is quite interesting and makes for an interesting view. My own circumstances have been very trying this year and I can see why as when I input my personal spending patterns it shows me having to cope with a personal inflation rate of nearly 8% for the past 18 months - no wonder I have to be hard working capitalist.

Here you go, peek if you dare...http://www.neighbourhood.statistics.gov.uk/HTMLDocs/dvc14/index.html

Monetary defeat for the UK?

When the Bank of England is in such a terrible corner, mainly of its own making I may add, it is hard to know whether to laugh or cry.

For today, with ts Governor actively wringing his hands, the Bank announced that inflation will likely stay at over 3% for a year or two more. Not much we can do, says the Bank, the Pound is sinking and we can't raise rates as the economy won't be able to hack it.

What a disastrous situation to have ended in. Anyone who thinks we are nearly through the recession and the pain needs their head examining on this evidence. We are so anaemic in terms of GDP growth that even adding in nearly a year's worth of free GDP money in the form of QE has not revived much, if anything and in addition it has weakened the currency which is now sinking against the might QE powered Dollar and wasted Euro.

Any move to raise interest rates is considered insane, locking in further the zombie economy that we have now (and baking in the next financial scandal, when people got nuts as rates rise and they lose their houses in 2015-2017, this will be all the fault of rapacious bankers).

Is there another answer, it is hard to see now given the terrible position already created. Surely rates do start to need to rise a bit though, even if only 0.5% over the course of this year. Higher rates will mean better returns for investment which has been pathetic over the past few years. It will also spook bond buyers and push allocation of finance into more productive areas of the economy.

No chance of this though I fear, as the Bank accepts its defeat. The only hope is that Bank is always wrong, so we are in fact probably set for a nice period of deflation!

V or W ? I or D ?

Thinking back to 2008-9, two debates raged. A V-shaped recovery, or a W ? (or a U or an L ...) Inflation or deflation ?

And now we know. It's I for sure, and W (at best) - even if some persuaded themselves the first leg was a V.

I was never 100% certain about I/D: inflation was my first instinct (hence loading up with max NS&I tax-free index-linked); but never having studied economics I had no confident counter against the many who seemed to have strong arguments for D. Perhaps it would have been D had the authorities not been so smart as to helicopter in all that dosh.

But the V was never on, that much was clear.

Interestingly, oil is still comfortably in 3 figures. Can this last ? Everything hinges on China and India: more on this when time permits.

ND

Mervyn King Thinks a Forward Curve is a Forecast

Mervyn King is a moron, and I am very worried. Introducing the latest BoE Inflation Report, he delivers himself of the following tripe:

"In the light of futures prices for energy, food and other commodities, the Committee judges that a reasonable central view is that measured inflation will begin to fall back next year."

Elaborating, the Report states:

"The MPC’s central forecast is conditioned on futures prices for commodities, which are broadly flat. … Energy prices are assumed to evolve broadly in line with the paths implied by futures markets over the forecast period."

Saints preserve us ! Just because the word "forward" sounds just a teeny weeny bit like "forecast" - you know, two syllables, starting with F-O-R ? Would you care to check the evolution of past forward curves - for any commodity you like to mention - and subsequent spot-prices ? Forward curves are lousy estimators of future prices: if they were any good as estimators, who would ever need a hedge ?

Say after me, and then write out one thousand times: a forward curve is not a forecast. And then write out your resignation, in favour of someone who understands how markets work.

ND

How long can this be ignored?

The British retail consortium monthly shop price inflation survey reported inflation fell 0.1%.
Good news. Or it might be if it wasn't still 1.5% up from last year. Food rose 0.9% and is running 2.5% higher than last year, with fresh food leading the hike.

"Good news for customers: Shop price inflation remained low and well below other measures of inflation as a slowdown in nonfood prices compensated for an increase in food inflation," said Stephen Robertson, BRC's director general.

BRC said that despite the increase in food price inflation, partly due to higher animal feed, palm oil and cocoa prices, its central view is that the recent period of high and volatile shop price inflation "appears to be over for now." It warned, however, that "the recent shock in the supply of wheat is likely to put pressure on food inflation in the coming months."

The drought in Russia is putting the pressure onto wheat prices. For those following our cocoa story that price is still slightly down. So it seems that the inflation in food is being offset by cuts to prices in non food. Heavy summer discounting, as we anecdotally reported, does seem to be widespread.

CPI stays stubbornly at 3.2%. An analyst on Radio 5 said that the fears of an interest rate hike, due to the inflation numbers on food, were just fears. The economy is too fragile, the worldwide recovery is too weak and the damage to borrowers of a rise too catastrophic to allow Mr King to permit it. The reporter concluded that interest rates would not rise this year and probably not next year either.
I would agree with that. Except for the next year bit....

One of the UK's leading fashion chains, NEXT, warned today that prices may rise by as much as 8% next year due to higher costs and January's VAT hike.

That is a real problem. A VAT hike at a time of the traditional winter increased fuel bill is going to put real pressure on the MPC. NEXT are blaming an increase in cotton prices and the VAT jump for the predicted price rises.
The VAT rise will land on the non food items that are currently helping to keep the lid on the inflation beast. NEXT has already lowered its numbers after a promising start. Sales have slowed.
How will the government deal with rising prices and falling sales, whilst being unable to raise interests rates for fear of brining the whole lot down? Will they just grit their teeth and hope it takes care of itself?