Inflation has always been a variable calculation and subject to the vagaries of political influence and favour. After all in the UK we have a range of inflation measures from the Consumer Price Index (CPI) currently at 2.1%, the Retail Price Index (RPI) currently at 4.2% and RPI-X which includes mortgage interest payments and stands at 3.1%. However, in addition to this there is a useful personal inflation calculator on the Government’s National Statistics office website which is certainly worth a visit (www.statistics.gov.uk). This will allow you to calculate your own personal rate of inflation and for many will come as a rather unpleasant shock. A few key strokes from me and the Urquhart Stewart rate of inflation came out at a figure between 5% & 7% - somewhat different from that proffered to us by our knowledgeable leaders.
Both the US and the Eurozone are also seeing prices rising albeit from a low level. The Eurozone figure rose again in November from 2.6% to 3%, with German inflation at its highest point for a decade – a worrying sign for German banking officials. US inflation is higher at 2.7% and certainly will be seeing the negative effect of the significant weakening of the Dollar as imports become more expensive. This of course is being further exacerbated by the high crude oil price which has a far greater impact on US gasoline prices than our heavily taxed UK petrol. I have mentioned before the changes in China and their current inflation of 6.5% will be, in economic terms, effectively their most important export to the rest of the world.
So why is this occurring? Well the main culprit can be easily identified arising from energy and foodstuff costs, underpinned by a surging demand from those fast developing emerging nations. However, they are not alone in their blame, as the somewhat knee-jerk decision from the American President to directly encourage (with tax incentives) the production of bio fuel crops has certainly constricted the supply of corn and other food crops.
The easy decision would be to cut rates to ease the pressures on the domestic economy – but such a decision could encourage further inflationary pressure not least of which will be from a weaker Sterling which would import higher overseas costs.
The effective suppression of inflation was one of the primary determinants in the improvement of the UK economy from the 1980’s. After last week’s central bank decisions on interest rates, probably the most crucial decision that it will have to take over the next year will be whether to stand firm against inflation, at the expense of the domestic economy, or to give in to populist politicians and cut rates to try and avoid recession. After all, what is the Governor of the Bank of England’s remit? To maintain inflation at around 2% - as currently instructed? Or to manage the broader economy? Watch out for weasel words from the politicians in this respect over the next few months.
And finally... disastrous festive news from Australia. Santa has apparently been sacked for singing Christmas songs to children. It is understood that Santa was instructed not to say “Ho,ho,ho” as this might be confused with the American slang term for a prostitute: instead he was requested to say “Ha,ha,ha”. Also he sang “Jingle Bells” – well that was probably the last straw. The company concerned has denied the story and said that Santa was sacked because of his “attitude”. Like Santa’s really “bovvered”.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management