The Saturday Economist – bad news on inflation, the cost of a Central Bank Governor keeps on rising…

The Saturday Economist 22nd December

Economics news – Bad news on inflation as the cost of a central Bank Governor keeps on rising.

Trends in Inflation
Bad news on inflation this week, the cost of a central Bank Governor just keeps on rising. Mark Carney is to receive a lodging allowance of £250,000 on top of his annual £624,000 salary and pension. The total cost per annum of the new Governor is now £874,000 (excluding National Insurance). Is this evidence of service sector inflation? I would think so.

In 2012, the cost of a governor was just £305,000 excluding pension fund top up. OK the current governor’s pension is fully funded and invested in index linked gilts as a hedge against inflation and interest rate rises. That said, the cost of the Canadian Central Banker is an inflationary import over the five year term. So much for rebalancing the economy.

The package excludes, car, driver, medical and dental insurance. The latter will be money well spent to keep a smile on Governor Carney’s face in the tough years ahead.

Inflation CPI
So it proved with the inflation figures this week. Inflation CPI basis held at 2.7% as RPI and RPIX inflation edged slightly lower to 3% and 2.9%. Excluding the near twenty per cent rise in education costs, most other categories were ahead of the 2% target. Clothing, footwear, furniture and household goods remain under price pressure and the cost of alcohol and tobacco increased by just under 6%.

The MPC believe that inflation is likely to remain above the 2% target for the next year or so, owing in part to the continuing impact of the rise in university tuition fees and higher domestic gas and electricity prices. This is no time to change the MPC target to nominal GDP, the inflation target of itself is proving elusive.

In other news, the rate of manufacturing price increases fell to 2.2% from 2.6% in October and input prices were lower by -0.3% as oil prices stabilized. This was better news for policy makers and a manifestation of conflicting signals within the economy as to future price trends.

Retail Sales
With retail inflation so high, real earnings are still expected to be in negative territory placing greater pressure on household spending and retail sales. So it proved with actual retail sales volumes in November up by just 0.9% compared to 0.8% in October and an average 2.2% over the prior five months.

Is this as bad as it looks? Not really, excluding food and fuel, overall retail sales were up by just under 4% and internet sales were up by 8%. Despite the earnings squeeze, there is life in the consumer, as employment prospects have improved. No triple dip in prospect, we expect a rebound to modest growth in 2013.

Inflation Watch Thursday close
Oil price Brent Crude closed at $110 per barrel compared to an average $109 in November and December last year. We expect oil prices to move significantly higher in 2013 placing greater pressure on the inflation target.

Markets Update –  
As we write today Friday am, UK ten year gilt yields closed at 1.94 from 1.89 and US rates closed at 1.79 from 1.70. Gilt prices will be under greater pressure in 2013 and yields are set to rise further, back towards some semblance of reality.

In markets the FTSE at 5958, is testing the 6000 level but we expect a push through into higher ground in the New Year as growth and earnings prospects improve.

In currencies, the dollar closed steady against the Euro at 1.32, Sterling closed against the Euro at 1.25 and the Sterling Dollar rate closed at 1.62. The Euro miracle continues, Greek Debt has been upgraded this week. It’s a long road, with a resilient can and lots of willing feet to do the kicking in the Euroland progress to banking union.

That’s all for this week and in fact that is all for this year. No Sunday Times and Croissants or Saturday Economist for two weeks, we are off skiing in Italy for part of the Winter Break.

I would like to wish everyone a Merry Christmas and a Happy New Year and hope you and your families enjoy a happy break over the holidays. Enjoy the turkey. JKA

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