The Bank of England is in quite a pickle of its own making

This morning has brought us up to date on the UK economy at the opening of the year and it is good news overall.

UK gross domestic product (GDP) is estimated to have increased by an unrevised 0.8% in Quarter 1 (Jan to Mar) 2022.

The level of real GDP remains 0.7% above where it was pre-coronavirus (COVID-19) at Quarter 4 (Oct to Dec) 2019

I say good news because if they were going to be revised it was only going to be one way as we look at how 2022 has developed. Also on the optimistic side is this on our energy exposure from McKinsey & Company.

So the energy crisis may well impact us less than other economies.

But an issue I have been highlighting for some time was also on the move in the first quarter.

Real Household Disposable Income (RHDI) fell by 0.2% this quarter – nominal household gross disposable income grew but was offset by quarterly household inflation; this is the fourth consecutive quarter of real negative growth in disposable income.

That is a consequence of the cost of living crisis which has got worse since then meaning that the going is getting tougher for the UK economy.

Bank of England Governor Andrew Bailey

Governor Bailey spoke at the ECB conference in Sintra yesterday. According to the Bank of England house journal he wanted to give the impression of being a born-again inflation fighter.

Speaking with other central bankers at a European Central Bank conference in Sintra, Portugal, Andrew Bailey said the BoE needed the option of half-point interest rate rises to address inflation but did not commit to further increases.
But he was adamant that the BoE would curb rapidly rising prices even if that meant pain for households. “The key thing for us is to bring inflation back down to target and that is what we will do,” Bailey said. ( Financial Times)

Rather curiously in the light of GDP figures that show us outperforming our fears there was also this.

“I think the UK economy is probably weakening rather earlier and somewhat more than others,” Bailey said, attributing the problems to the energy price shock that all European economies faced alongside a UK problem of people dropping out of the labour market. ( FT)

Indeed his view gets even odder when we note that the UK is less exposed on the energy front to others. Maybe no-one has told the Governor yet, who does not seem to be checking the news flow either.

German energy giant Uniper is discussing a possible bailout from Berlin after Russia curbed natural gas deliveries, forcing the utility to buy fuel in the spot market at higher prices ( @JavierBlas)

Considering his past track record on forecasting inflation more than a few will see this as being potentially hopeful.

He said inflation would persist at a higher level in the UK than elsewhere, lengthening the pain felt by households across Britain.
“Unfortunately, there is going to be a further step up in UK inflation later this year because that’s a product of the way the energy price cap interacts with the energy prices we have observed over the last few months,” Bailey said.

We only need to look across the Channel to see a country that has an energy system in a mess ( I mean a bigger mess than ours). Its nukes are suffering from neglect and maintenance problems.

EDF lowered its 2022 target to 280-300 TWh from 295-315 TWh. That’s the 3rd cut this year  2022 atomic output will be lowest in 30 years ( @SStapcyznski )

So they have been importing power from us in the UK ( although not much today because we have so little wind) and presumably we are getting a good price for it. So costs are high but the government is simply kicking the can.

France’s energy price cap has been extended to the end of this year, Prime Minister Élisabeth Borne announced yesterday (June 23).

The bouclier tarifaire, first introduced in November last year, froze gas prices at October 2021 rates and also limited electricity prices from increasing by more than 4%. The measure was supposed to end on June 30 but has now been extended.  ( ConnexionFrance)

It is an expensive can too.

Brussels-based think tank Bruegel estimates that France will spend €38billion in measures designed to counter rising prices.  ( ConnexionFrance )

At some point there will have to be a rationalisation in France where inflation is lower now ( 6.5% in June on the Euro area measure) but at some point will have to catch up unless they intend to just keep borrowing and adding to their debt.

There was also something of an echo from the past in the words of Governor Bailey.

“I would agree with that,” he said referring to the markets properly pricing in the risk that rates would have to rise more than expected. ( FT)

Not quite the same as the “sooner than markets expect” from Governor Carney but in response to something much larger than he was thinking.

Financial markets expect rates to rise further to around 3 per cent in a year’s time. ( FT)

Actually with the UK ten-year yield at 2.35% I think they should say some financial markets.

How did she get the job?

We got confirmation yesterday.

LONDON, June 29 (Reuters) – The Bank of England should move very gradually to tighten monetary policy because the economy now appears to be slowing faster than previously thought, incoming BoE policymaker Swati Dhingra said on Wednesday.

This is rather like in Yes Minister when Sir Humphrey Appleby tells us you do not seek to influence people, rather you appoint those who do not need influencing.

“Newer data is starting to show that possibly a slowdown has become much more imminent than we thought before,” she said.

Britain’s main measure of consumer sentiment, from GfK, sank to its lowest level since at least 1974 in June as households feared the impact of surging inflation.

How long before she votes for an interest-rate cut?


We can step back to May last year for a perspective on this. On the 13th the Guardian reported this.

The governor of the Bank of England has sought to calm financial market fears over rising inflation but has exposed a policy rift with Threadneedle Street’s outgoing chief economist, Andy Haldane.

The day after Haldane used a newspaper article to warn of the need to prevent the “inflation genie” getting out of the bottle, Andrew Bailey said he thought upward price pressures would prove temporary.

He was of course completely wrong. In fact he doubled-down.

“So the really big question is, is [higher inflation] going to persist or not? Our view is that on the basis of what we’re seeing so far, we don’t think it is.”

So I would not be taking too much notice of his forecasts.

Still there was some better news from the perspective of the Governor this morning. Perhaps his mind may still be suffering from the after effects of the fine ECB wine cellar. But he should still be able to manage a smile at this.

“UK annual house price growth slowed modestly to 10.7% in June, from 11.2% in May. Prices rose by 0.3% month-on-month, after taking account of seasonal effects, the 11th consecutive monthly increase.

“The price of a typical UK home climbed to a new record high of £271,613, with average prices increasing by over £26,000 in the past year. ( The Nationwide )

The ECB faces inflation, fragmentation and the risk of recession

Over the last 24 hours the heat has begun to be turned up on the ECB. Not quite literally as whilst they have decamped to the resort of Sintra in Portugal the weather is not so good. It will have to be the sun bed for President Lagarde. Switching back to the economics some extraordinary quotes have emerged.


In fact according to ForexLive he went on to say this about the interest-rate hikes.

“are a no brainer for me”

The problem for the head of the Belgian central bank is if anyone asks him why he has not voted for any so far? We know this because we were told that the decision not to increase interest-rates on the 9th of this month was unanimous.

The situation gets worse for him as we note this morning’s inflation numbers from Spain.

In June, the estimated annual variation rate of the HCPI stood at 10.0%, one point and a half
more than the one registered in the previous month.
For its part, the estimated monthly variation of the HCPI is 1.8%.

So the Euro area measure has reached double-digits and it has soared again on a monthly basis. We only get limited detail at this stage.

This evolution is mainly due to the increase in fuel prices, higher this month than in June 2021,
and in food and non-alcoholic beverages, compared to the stability recorded last year.
The increase in hotel, café and restaurant prices, higher than last year, also played a role.

No doubt our valiant Belgian inflation fighter would want us to focus on numbers like this.

For its part, the estimated annual variation rate of underlying inflation (general index excluding
non-processed food and energy products) increases six tenths, to 5.5%. If confirmed, it would
be the highest since August 1993.

The problem in addition to the “highest since August 1993” bit is that it is not far off treble the 2% target he has. Of course it gas the problem that trying to ignore energy and food costs right now gives off Marie Antoinette vibes.

President Christine Lagarde

Speaking of Marie Antoinette her countrywoman President Christine Lagarde gave the set piece speech. It appears that she no longer thinks that inflation is a “hump”

Inflation in the euro area is undesirably high and it is projected to stay that way for some time to come. This is a great challenge for our monetary policy.

Doe those wondering about this here she is from December.

ECB’s Lagarde: Inflation Profile Looks Like Hump, Though This Hump Will Eventually Decline And We Project Inflation To Decline In 2022 ( @LiveSquawk )

She is now trying to give the appearance of action as even she must realise that double-digit inflation rates are applying pressure.

In response to the changing inflation outlook, we have consistently followed the path of policy normalisation since December last year, sequentially adjusting our policy stance.

Just as a reminder the ECB deposit rate is unchanged at -0.5% the lowest it has ever been in case you think that she is using what “normalisation” gas been defined as previously.

Indeed you know when a central bank is under real pressure because they come up with a new inflation measure.

A new ECB indicator of domestic inflation – which removes items with a high import content – currently stands above 3%.

From this we learn that even a litany of research students and Phds with high powered computers cannot find a way to twist,manipulate and distort the numbers to get inflation back on target. Probably because the inflation has spread as I predicted and President Lagarde denied.

At the same time, inflation pressures are intensifying and broadening through the domestic economy. Almost four-fifths of items in the consumption basket had annual price increases above 2% in April, and this is not only a reflection of high import prices.

Even more embarrassing is this claim.

Third, these factors combined have led us to project core inflation at 2.3% in 2024 – and, in the euro area, core inflation tends to be an indicator of headline inflation over the medium term.

On the same basis they told us inflation would be 1.2% now. How is that going?

Next on the list is to claim that interest-rates have already risen.

The €STR forward rate ten years out is around 240 basis points above its pre-pandemic level, without policy rates having yet moved. One-year forward real rates, one-year ahead and five-year forward real rates, five-years ahead are around 100 and 140 basis points higher, respectively.

The problem with this is that much of this is due to bond markets following developments abroad where there have been interest-rate increases. The Bank of England is there in a small way but the main player is the US Federal Reserve which has just increased interest-rates by 0.75% and is promising 3% plus. So Euro area rates have been dragged higher in response to this as investors will no longer accept negative bond yields for example.

So far all we have are promises from Christine Lagarde which is awkward as she is the person who called the disastrous bailout for Greece as “shock and awe” and told us her IMF plan for Argentina was going well just before its economy collapsed.

Consistent with moving gradually, we announced that we will end net asset purchases under our asset purchase programme on 1 July and intend to raise our three key interest rates by 25 basis points at our next meeting on 21 July.

But we also announced that we expect to raise the key interest rates again in September, and “if the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.”

Fragmentation ( Italy )

This did get a mention from President Lagarde.

Second, the euro area has a unique institutional set-up, built around 19 not yet fully integrated national financial markets and 19 national fiscal policies, with limited coordination. This presents the risk of our monetary policy stance being unevenly transmitted across the union.

Her predecessor unintentionally highlighted the issue in his new role of Prime Minister of Italy.


In any such situation the heat will go straight onto Italy and its bond market.

This is a real problem and let me remind you that back in the day we were told “one size fits all” for monetary policy. This has now become this.

SINTRA, Portugal, June 29 (Reuters) – European Central Bank policymakers are weighing up whether or not they should announce the size and duration of their upcoming bond-buying scheme, designed to curb financing costs for Italy and other debt-laden countries, sources told Reuters.

There is also talk about it being “sterilised” which brings echoes of the Securities Markets Programme for those who want to look it up on here.


We can use this morning’s monetary data to further analyse the rhetoric of President Lagarde and the ECB. You see with inflation at 10%  in Spain and more like 20% in the Baltics she is still doing this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.8% in May from 8.2% in April.

As there is no economic growth this can only be seen as a continuing push for inflation and looked at like that the change from 8.2% to 7.8% is a sideshow. If we look further ahead ( 18-24 months) we see this.

Annual growth rate of broad monetary aggregate M3 decreased to 5.6% in May 2022 from 6.1% in April (revised from 6.0%)

Again if we assume there will be not much growth then that suggests inflation of 5% in 2023/4.

So as well as the failure of “one size fits all” for Euro area monetary policy they will be dealing with high inflation and a stagnating ( probably shrinking) economy.

If G7 get their way we will see even higher oil prices

The last year or so has been one of a building energy crisis. Whilst there has been an effort by central bankers and governments to blame the war in Ukraine the low in the oil price over the past year was mid August 2021. It was already on the rise as were gas prices. This was exacerbated by the political rhetoric at COP26 last November.

The UK Presidency has worked hard to end unabated coal power, the most polluting fossil fuel. 65 countries have now committed to coal phase out, including more than 20 new commitments at COP26.

It feels like a comedy sketch now as we look at subsequent events and there was more.

We cannot stop at coal. We need to phase down the use of all fossil fuels across the energy sector. At COP26, 34 countries and 5 public finance institutions committed to end direct public support (c.$24 billion annually) for the international unabated fossil fuel energy.

That has rather morphed into President Biden trying to persuade the Gulf States to produce more oil which is awkward on two counts. They must be wondering why he has been so anti US production? Also there is this as reported by @Amena_Bakr.

The US wants more oil from Opec Plus, the EU wants more oil from Opec Plus, the G7 wants more oil from Opec-Plus. And Opec-Plus is running low on spare capacity…using what they have left might cause more panic to an already volatile market.

As you can see they may well drive oil prices even higher which has happened as they have been debating this at the current G7 meeting. Also there has been this reported by Reuters.

“I had a call with MbZ,” Macron was heard telling U.S. President Joe Biden on the sidelines of the G7 summit, using shorthand for UAE leader Sheikh Mohammed bin Zayed al-Nahyan. “He told me two things. I’m at a maximum, maximum (production capacity). This is what he claims.”

“And then he said (the) Saudis can increase by 150 (thousands barrels per day). Maybe a little bit more, but they don’t have huge capacities before six months’ time,” Macron said.


Monty Python came up with the ministry for silly walks whereas the present G7 meeting seems determined to come up with silly ideas.

According to a draft text seen by the Financial Times, leaders will explore the “feasibility” of introducing temporary price caps on imports of energy — a reference to a US-led push for a ceiling on the Russian oil price. A G7 official said earlier that capitals agreed it was a good idea, but a “great deal of work” remained to be done to make it a reality.

The obvious problem here is highlighted by

The United States, the UK, and, more recently, the EU, have all imposed bans on the imports of Russian oil and oil products, but China and India have stepped up their purchases as Russian crude trades at a sharp discount to the international benchmark.

How do you impose a price cap on something you are not buying? If they thought they could persuade China then they have already scored something of an own goal,

This suggests two things: one, that there is no point in trying to convince China to stop buying Russian oil, at least not in the conventional way of simply asking or offering something in return. There is little G7 could offer in return, especially now that it is challenging Beijing’s Belt and Road initiative with a war chest of $600 billion to be spent on infrastructure projects in the poorer countries of the world. (

They get onto pointing out that the price cap would be likely to have the reverse effect on world oil prices.

The price cap idea also assumes that Russia will choose to continue selling its oil rather than halting all exports and watching how Brent crude hits $200 in weeks. This possibility was noted by energy industry executives, by the way.

Actually there are other problems with world oil production.

Ecuador’s energy ministry warned Sunday that oil production had reached a “critical” level and could be halted entirely within 48 hours if protests and roadblocks continue “Oil production is at a critical level,” the ministry said in a statement. ( ForexLive )

Libya too.

OIL MARKET: I said this again. While everyone focuses about Russia, do not forget about Libya, where things are going from bad to worse. On Monday, Mustafa Sanalla, the chairman of the national oil company admitted: “The situation is very serious” ( @JavierBlas)

It looks as though output has halved since mid-April giving another reason why oil prices are high and production responding less than you might think.

Then the issue of asking for more production outside Russia collides with this.

French officials focused during discussions on Monday on ways of moderating prices via higher output. In particular, France wants to explore ways of bringing production from Venezuela and Iran, both subject to US sanctions, back on the market. ( Financial Times).

The European Union and the US

These two parties issued a statement yesterday. The situation is especially acute in Europe at the moment.

This was most recently demonstrated by the politically motivated acute disruptions of gas supplies to several European Union Member States.

Another way of looking at this is that my country the UK has been exporting the maximum amount of power it can via the interconnectors in recent days ( circa 5GW). As I type this it is 4.3 GW and we have even been running a small coal plant (0.23 GW ) ti help too. It is hard to describe the past political rhetoric this contradicts but this is my present favourite.

The EU could hit Britain and Jersey’s energy supply over the UK’s failure to provide sufficient fishing licences to French fishers, France’s EU affairs minister has said.

Clément Beaune, who is a close ally of the French president, Emmanuel Macron ( The Guardian from last October).

Returning to the statement why should fossil fuel producers help you when you are saying this?

The United States and the European Commission are also taking decisive action to reduce overall demand for fossil fuels in line with the Paris Agreement and our shared goal of net zero emissions no later than 2050.

As to smart thermostats surely they cost rather than save energy.

We will encourage Member States and European and U.S. companies to reach an initial goal of deploying at least 1.5 million energy saving smart thermostats in European households this year.

The reality is that rationing looks to be on its way or if you prefer the euphemism.

energy demand response solutions.

LNG is good

Since March, global LNG exports to Europe have risen by 75 percent compared to 2021, while U.S. LNG exports to Europe have nearly tripled.

LNG is bad

Mindful of the environmental impact of LNG production and consumption,


The central issue is that we are being led by people who cannot admit their mistakes. Thus they continue to make them. A price cap plan would likely send the oil price even higher and a lot higher as people scramble to buy. In time there would be more production but not for a while because of the anti fossil fuel policies of the same group of politicians. The absolute mess here is highlighted by this from the BBC about my home country the UK.

The Jackdaw field, east of Aberdeen, has the potential to produce 6.5% of Britain’s gas output.
The regulatory approval comes as the UK government seeks to boost domestic energy output following Russia’s invasion of Ukraine.Shell’s proposals were initially rejected on environmental grounds in October.

Thus they seem set to make this even worse.

The G7 leaders were meeting four months into a war in Ukraine which has pushed up the price of food and hydrocarbons, triggering fears of a global recession. ( Financial Times)

We seem to be sanctioning ourselves……

The BIS suggests it is time for much higher interest-rates

Over the weekend when some of us were busy watching the sport ( athletics and cricket) and/or the music from Glastonbury the central bankers central bank entered the economic fray.

  • Timely and decisive action by central banks is needed to restore low and stable inflation while limiting the hit to growth and safeguarding financial stability.
  • The risk of stagflation looms over the global economy as the threat of a new inflation era coincides with a weaker outlook for growth and elevated financial vulnerabilities.
  • Policymakers must press ahead with reforms to support long-term growth and lay the groundwork for more normal fiscal and monetary policy settings.

The last point is especially ominous for those who follow the policy statements of the European Central Bank or ECB which is always calling for reform and by its repetition never happens. As to the main points it is somewhat breathtaking that any action now is described as “Timely and decisive” when in fact it takes around 18 months to work and we have high inflation now. For today’s inflation problems Carole King was on the ball back in the day.

It’s too late, baby
It’s too late now, darling
It’s too late

They are also struggling to come to terms with something we have been expecting since last year ( when some timely action could have been enacted) which is Stagflation. However they are still off the pace as I note this.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is 0.0 percent on June 16, unchanged from June 15 after rounding. ( Atlanta Federal Reserve)

So their expectation is for no growth for the US which would follow a 1.5% ( annualised so around -0.4% as we would record it) growth in the first quarter of the year. So for what it is worth the US may be in recession, but more importantly is struggling so far this year. It also has an inflation rate that is around 9% if measured using the European system. So we have world stagflation now.

Proposed Policy Response

After the public relations effort of the headlines we do get a confession of sorts.

If relative price adjustments are persistent and higher inflation triggers second-round effects, central banks have no choice but to respond.

The translation is that if you waste a lot of time by claiming the inflationary burst is “transitory” you then have to respond. The BIS is troubled by the scale of the tightening that looks to be required.

In most countries, inflation rates are much higher than usual at the start of a tightening cycle, and real and nominal policy rates much lower, which suggests that a stronger tightening may be required to bring inflation under control.

Again they are trying to swerve the issue that inflation rates are “much higher than usual” because the central banks denied reality for so long. They do get round to it eventually sort of.

But that prescription assumes that the resulting inflation overshoot is temporary and not too large. In the light of recent experience, it is harder to argue for such a clear-cut

Also the BIS finds itself forced to face the fact that past decisions by central banks now have consequences as they asset prices ( bonds, house prices and equities) higher and in doing so encouraged more debt to be taken on.

At the same time, elevated asset prices and high debt levels mean that the output costs of tighter financial conditions could be larger than in the past.

We then get a critique of what the policy response has been so far.

Gradually raising policy rates at a pace that falls short of inflation increases means falling real interest rates. This is hard to reconcile with the need to keep inflation risks in check.

Followed by the plan looking ahead.

Given the extent of the inflationary pressure unleashed over the past year, real policy rates will need to increase significantly in order to moderate demand.

They are placing themselves firmly behind the US Federal Reserve with its latest increase in interest-rates of 0.75%. Indeed they raise the prospect of future increases being even larger.

Delaying the necessary adjustment heightens the likelihood that even larger and more costly future policy rate increases will be required, particularly if inflation becomes
entrenched in household and firm behaviour and inflation expectations.

Also I note they are looking to “moderate demand” when many countries are either contracting or near to it already which brings us on to the new central banking fantasy theory.

A Soft Landing

It is revealing that they are now thinking about this.

Most central banks are now starting to tighten policy, often in the face of high inflation. A key question is
whether they will be able to engineer a “soft landing” – ie a tightening cycle that ends without a recession.

They give a troubling prescription

A key one is that hard landings are more likely when monetary tightening is preceded by a build-up of
financial vulnerabilities.

So much of what central banks have previously been encouraging. Next comes what has been their policy for more than a decade.

Financial vulnerabilities are more likely to emerge when interest rates are low.

I suppose that is most troubling for the ECB and Bank of Japan who still have negative interest-rates.

Actually they miss out more than they include.

We do not consider the role of balance sheet, exchange rate or credit policies in policy tightening.

Plus they are not really sure what a hard landing is.

There is no standard definition of a hard landing.

Up in their Ivory Tower they cannot see those struggling below because the clouds get in the way.


We can start with something many have believed all along and the emphasis is mine.

Moreover, the unexpected inflation burst will erode to some extent the value of long-term fixed income debt

It is a tactic of the ages to pump things up basking in approval and then denying that the consequences are anything to do with you. For newer readers I can take you back more than 2 years to June 2nd 2020.

The annual rate is now 9%. On terms of economic impact then that is supposed to give us a nominal GDP growth rate also of 9% in a couple of years. Because of where we are there are all sorts or problems with applying that rule but it is grounds for those who have inflation fears.

Actually if you look at the UK now that was stunningly accurate. Actually you do not need my explanation as the official denial is clear enough.

However, surprise inflation is not a mechanism that fiscal or monetary authorities can or should rely on to control
public debt over the medium term.

There are two factors in play here. Firstly they want us to believe they will now get tough on inflation in the hope our behaviour will do some of the job for them. In a way this is already on the path to them stepping back from it if we consider the psychology at play. But even this rose tinted view of central banks has a problem with the bit below. After all they created the scenario below.

The large stocks of government debt held by central banks complicate matters. As explained in last year’s Annual Economic Report, they increase the sensitivity of
overall fiscal positions to higher rates. In effect, they transform long-term fixed income debt into debt indexed at the overnight rate (the interest rate on bank
reserves). The effect can be quite large.

This is the real reason interest-rates are so far below inflation.




Retail Sales bring more signs of the stagflation affecting the UK economy

This week has been a particularly rich one for UK economic data and we finish it with a release which pretty much confirms our view of the state of play.

Retail sales volumes fell by 0.5% in May 2022 following a rise of 0.4% in April 2022 (revised from a rise of 1.4%);

If we take May and April together we have basically gone nowhere especially as the April revision reminds us of the margin of error for this indicator. A pretty clear suggestion of the stag part of stagflation and the inflation bit comes here.

Compared with the same period a year earlier, sales volumes over the last three months fell by 2.8%, while sales values rose by 6.9% reflecting an annual implied deflator (or implied growth in prices) of 9.7%

So no growth and inflation nudging double-digits territory.

Breaking it down

The area that was particularly weak was food and it is also below pre coronavirus levels.

Food store sales volumes fell by 1.6% in May 2022, 2.4% below their pre-coronavirus (COVID-19) February 2020 levels.

Regular readers will recall that since January 29th 2015 I have been making the point that high inflation is bad for retail sales and it seems that our official statisticians are noting this.

Affordability may explain some of the falls in recent months. Results from >our Opinions and Lifestyle Survey (OPN), covering the period 11 to 22 May 2022, found that 88% of adults reported that their cost of living had increased over the last month, up from 62% when this question was first asked (3 to 14 November 2021). The most common reason reported by adults who said their cost of living had increased was an increase in the price of food shopping (93%).

I know some of them read this blog so perhaps the message has seeped through. Correlation is of course not causation but the change below is about as good as we ever get in economics.

When asked about their shopping habits in the past two weeks, 44% of adults reported that they were buying less food when food shopping. This proportion appears to be increasing, having been 41% in the previous period (27 April to 8 May 2022) and 18% at the beginning of 2022.

If that wasn’t enough for you.

Comments from some food retailers highlighted that they are seeing a decline in volumes sold because of increased food prices and cost of living impacts.

Fuel Sales

These are being affected by the ch-ch-changes in the economy.

The strength of fuel sales, despite rising fuel prices, may in part be linked to the continued shift towards hybrid working. Analysis of the Opinions and Lifestyle Survey reported that during 2022, the proportion of workers both working at home and at their usual place of work (“hybrid working”) has been rising, while the proportion of those working from home exclusively has fallen.

On an anecdotal level this is true of my friends and acquaintances. With the shift towards electric vehicles and hybrids which will not be in these numbers the overall move is likely to be stronger than shown.

Automotive fuel sales volumes rose by 1.1% in May 2022 down from 2.6% in April. Sales volumes were 1.6% below their pre-coronavirus February 2020 levels.

I did my bit for this month’s numbers by driving to a family event on Tuesday although it was not by choice as the railways were on strike.

Other Sectors

These fitted especially well with my theme about the impact of inflation.We have seen strong inflation figures for furniture ( The RPI category has seen inflation of 13% in the year to May) and the like and now we see this.

Household goods stores (such as furniture stores) sales volumes fell by 2.3% in May 2022 because of falls in each of its sub-industries. The feedback from retailers suggests that consumers are cutting back on spending because of increased prices and affordability concerns.

There may even have been an impact in the other direction here because whilst prices rose they rose by quite a bit less than last year.

Clothing stores reported a monthly increase in sales volumes of 2.2%. Feedback from some retailers suggests that the increase was linked to customers planning holidays and therefore buying new clothes.

Switching to the online sector then the theme there continues.

The proportion of online sales fell to 26.6% from 27.1% in April 2022. Despite the fall in May 2022, the proportion of online sales remains substantially above its level of 19.7% in February 2020 before the coronavirus (COVID-19) pandemic.

I am afraid that the bad news for the high street keeps on coming.

Some Perspective

Because of the impact of the pandemic and the lockdowns the annual comparison is distorted but we can look at the overall move.

When compared with the pre-coronavirus (COVID-19) level in February 2020, total retail sales were 2.6% and 13.0% higher in volume and value terms, respectively.

So we still have improved since then but the growth is slip-sliding away.

Compared with the same period a year earlier, sales volumes over the last three months fell by 2.8%

Business Surveys

These have been in the news a little and this morning’s has created a minor financial media frenzy.

Market research firm GfK said its consumer morale index, launched 48 years ago, fell to -41 in June from -40 in May, below levels that have previously preceded recessions. ( Reuters)

Reporting it as a “record low” is simultaneously true and not telling us much new as basically it is a reflection of the economic situation I think. The Markit business survey earlier this week was much more positive about the UK than the Euro area.

June data indicated that output growth across the UK private sector was unchanged from the 15-month low seen in May. Resilient business activity trends were seen across the service economy as a whole, but manufacturing production growth eased further to its lowest since February 2021.

I am no great fan of the PMI series but it showed us being stronger than the US as well so even with its errors it may at least be consistent across countries and areas.


We have seen a week that has fitted pretty well with what we have been expecting. We have an inflation surge which has taken away the growth we previously had via its impact on the cost of living. If there was a surprise it was the acceleration in house price growth but those numbers were only for April and even the Bank of England is getting edgy as its change to affordability rules highlighted.

Today has brought worrying news for house prices though. This is because if you look at the track record of our banks they frequently expand at or no to the top of the market.

LONDON, June 24 (Reuters) – Barclays (BARC.L) has struck a deal worth around 2.3 billion pounds ($2.8 billion) to buy specialist lender Kensington Mortgage Company, extending its reach in Britain’s housing market.

The acquisition represents one of Barclays’ biggest recent transactions and a sizeable bet on the property market.



The UK Public Finances are improving but only slowly

We are at the point of the month where we see something of a rush of UK economic data and we can to some extent continue yesterday’s theme of inflation being on the march.

Central government receipts in May 2022 were estimated to have been £66.6 billion, a £5.7 billion increase compared with May 2021. Of these receipts, tax revenue increased by £3.4 billion to £48.3 billion.

If we look at the detail then the rise in VAT ( for foreign readers an expenditure tax) at 10.8% is rather suspiciously similar to the inflation rate. The Bank of England which announced on Monday plans to boost the housing market will be pleased to see that Stamp Duty receipts are up by 79% to £1.3 billion. Hopefully there is some economic momentum behind the 9.3% rise in PAYE Income Tax,

There was also the increase in National Insurance or what will no doubt end up being called the Sunak Error.

In May 2022, compulsory social contributions (largely National Insurance contributions (NICs)) were £14.4 billion on an accrued basis, £2.0 billion more than in May 2021.

Some of this increase is a result of the increase in the NICs rate in place from April 2022 to March 2023.

We can move on to look at expenditure which at first looks optimistic via the reported decline.

Central government bodies spent £74.0 billion on current (or day-to-day) expenditure in May 2022, £2.2 billion less than in May 2021.

With inflation at these levels the public sector pay restrictions are having an impact and in fact pay fell from £13,9 billion a year ago to £13.7 billion this time around. I assume that is because of the decline of many Covid related health jobs such as vaccination and testing and tracing.

However the £2.2 billion in decline is less than half of the £4.6 billion boost in terms of reduced expenditure via the end of the various Furlough schemes. So something somewhere boosted the numbers and regular readers will be expecting this bit.

The recent high levels of debt interest payments are largely a result of higher inflation, as the interest paid on index-linked gilts rises with increases in the Retail Prices Index (RPI).

Okay, how much?

In May 2022, central government debt interest was £7.6 billion, of which the RPI uplift on index-linked gilts contributed £5.0 billion over and above the accrued coupon payments and other components of debt interest.

The rise on last year is £3.1 billion and continuing the theme reflects higher inflation or to be more specific inflation from the spring.

To estimate the RPI uplift for three-month lagged index-linked gilts in May 2022, we reference the RPI movement between February and March 2022. RPI increases in the most recent months will be reflected in our interest estimates in due course.

There is a nuance here in that £5 billion of what is recorded as expenditure is in fact an increase in debt so a capital change ( we owe more in terms of index-linked debt) as opposed to an income one. It is officially reported like this.

These movements are reflected in the government’s liabilities, which will be realised as the existing stock of index-linked gilts is redeemed.

I like the idea of us redeeming something! But of course the big picture is that we simply borrow it again.

Bringing it all together we get this.

Public sector net borrowing excluding public sector banks (PSNB ex) was £14.0 billion in May 2022, the third-highest May borrowing since monthly records began in 1993; this was £4.0 billion less than in May 2021 but £8.5 billion more than in May 2019, before the coronavirus (COVID-19) pandemic.

So we can sing along with The Beatles.

I’ve got to admit it’s getting better (better)
A little better all the time

Which is reinforced by this.

Since our last publication we have reduced our estimate of PSNB ex in the financial year ending (FYE) March 2022 by £0.9 billion which brought the full-year total to £143.7 billion; additionally we reduced PSNB ex in FYE March 2021 by £7.8 billion which brought the full-year total to £309.6 billion.

There is not a little humility for the numbers in this because if the numbers for around 2 years ago can be revised by £7.8 billion then we see the degree of uncertainty in current ones. The net improvement via revisions was £4.4 billion as April was revised a fair bit higher

But whilst we are getting better it feels slow progress and reminds me of the backing vocal sung by John Lennon.

(it can’t get no worse)

Looking Ahead

There will be a rise in expenditure next year due to this.

NEW: UK Govt confirms the “triple lock” will apply for next year’s state pension, meaning millions of pensioners are in line for 10%+ rises to their weekly income. Treasury minister confirms in response to written question. ( @JosephineCumbo)

Actually I should add on current plans as they have changed their mind on this issue before although with an election in the offing it is much less likely as pensioners tend to vote.

Bond Yields

The situation here has been like the nursery rhyme about the Grand Old Duke of York where world bond yields were marched up the hill ahead of the US interest-rate rise of 0.75%. But since then the 3.4% or so of the US ten-year yield has been replaced by 3.1% so they have been marched back down the hill again at least to some extent.

The UK has followed this pattern and our longer-term borrowing is between 2.4% and 2.5%. I would imagine that HM Treasury now very much regret not taking my advice to issue some century bonds ( 100 year) when we could issue for less than 1%.

National Debt

These numbers are open to more doubt than you might think but these are the best guide from today’s release.

Public sector net debt excluding public sector banks and the Bank of England (PSND ex BoE) was £2,041.8 billion at the end of May 2022, or around 82.8% of GDP, an increase of £88.0 billion but a reduction of 2.1 percentage points of GDP compared with May 2021.


The situation is one which has improved but has been doing so at a slow pace. The problem is not so much the public finances themselves but the prospects for the economy which have darkened via the cost of living crisis. Although we did get some relatively optimistic business survey news earlier.

At 53.1 in June, the headline seasonally adjusted S&P
Global / CIPS Flash UK Composite Output Index was
unchanged from the reading in May and posted above the
neutral 50.0 value for the sixteenth consecutive month.

Regular readers will be aware that these surveys have their issues but they hint at some growth and were quite a bit better than those in the Euro area. Anything right now will do as we see warning signals nearly everywhere.

Still we can rely on something at least which is my first rule of OBR Club ( that the OBR is always wrong)

This required it to borrow £14.0 billion, £3.7 billion more than the Office for Budget Responsibility (OBR) forecast.

It seems that the news about higher inflation has yet to make its way up to their Ivory Tower.

with debt interest spending in the year to date a fifth higher than forecast thanks to the jump in RPI inflation


Inflation rises as the cost of living crisis deepens

Yesterday we looked at the Bank of England and an apparently desperate attempt to stop house prices turning south. But also there was the issue of their failures on inflation which its Chief Economist seems to think can be corrected with some more measly 0.25% interest-rate rises. This morning’s inflation numbers release show he has yet another numbers problem.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 11.8%, up from 11.2% last month.

So the annual rate of inflation using the measure the Bank of England used to target is up by 0.6% which makes his quarter point increases look even more like a peashooter. If we look at the full RPI measure the monthly move is around 0.7%.

The all items RPI is 337.1, up from 334.6 in April.

That is before we get to the difference between the annual rate at 11.8% and interest-rates at 1.25%.

Of course back in 2002 a decision was made to switch to an inflation measure which produces numbers less likely to frighten people and so it has proven again.

The Consumer Prices Index (CPI) rose by 9.1% in the 12 months to May 2022, up from 9.0% in April.

So a 2.7% gain from their perspective especially as those most involved managed to keep their Bank pensions linked to the RPI. It is a shame to see so many media sources producing this as “inflation” without any mention that it excludes owner-occupied housing costs.

Prices are continuing to rise at their fastest rate for 40 years as food, energy and fuel costs continue to climb.

UK inflation, the rate at which prices rise, edged up to 9.1% in the 12 months to May, from 9% in April, the Office for National Statistics (ONS) said. ( BBC )

So that is the opening of our story and there is of course another step planned.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.9% in the 12 months to May 2022, up from 7.8% in April.

Should this succeed they will have reduced the recorded inflation rate by 3.8% or as ELO would tell us.

I get a strange magic
Oh, what a strange magic
Oh, it’s a strange magic
Got a strange magic
Got a strange magic

It is a long-running game where CPIH was pushed by Paul Johnson in his 2015 Inflation Review. That has gone so badly ( I mean let’s face it they way it has “added” housing costs but reduced inflation is so transparent) with it being widely ignored that in desperation they plan to keep the RPI name but turn it into a CPIH clone.

We can take that further and let me show you. Of the three measures above only the RPI includes this ( via a depreciation measure which is presently some 10.3% of it). What is it doing?

UK average house prices increased by 12.4% over the year to April 2022, up from 9.7% in March 2022……On a seasonally adjusted basis, average house prices in the UK increased by 0.4% between March and April 2022, following an increase of 0.7% in the previous month.

This presents an obvious problem for producing a lower inflation number so for those of you who think they make the numbers up well for around 17% of CPIH they do. They assume that home owners pay rent, ignoring the fact that one of the points of owning your own home is that you do not pay rent! How does that go into the inflation numbers?

Private rental prices paid by tenants in the UK rose by 2.8% in the 12 months to May 2022, up from 2.6% in the 12 months to April 2022.

You have just chopped 10% off inflation in this area via a numerical equivalent of gerrymandering. No-one in the real world can take advantage of this because if you buy you are either (lucky enough) that only the house price matters or paying a house price via a deposit and a mortgage over time for the rest.

Inflation Developments

This month has seen a further pick-up in the contribution of rising food prices to inflation. Even the CPIH measure is forced to admit there is something going on here.

Prices for food and non-alcoholic beverages rose by 8.7% in the year to May 2022…… Overall, prices rose by 1.5% between April and May 2022, compared with a fall of 0.3% between the same two months a year ago. The upward movement was broad-based, with upward contributions from 7 of the 11 detailed classes.

The RPI has its food category rising by 1.5% on the month with particular rises for eggs (5.7%), butter ( 4.2%) and coffee (3.8%).

A category that has pretty consistently been part of the move is the household goods category including furniture.

Prices for furniture, household equipment and maintenance rose by 11.0% in the year to May 2022. The resulting contribution of 0.60 percentage points was the highest from this division in the National Statistic series, which began in January 2006. ( CPIH based)

There was a 1.2% monthly move in the RPI series here led by furnishings at 1.5%.

There was another familiar feature which highlights that even without all the official meddling inflation measurement can be problematic.

The movement largely reflects price changes for computer games, particularly computer game downloads. Price movements for computer games can sometimes be large, in part depending on the composition of bestseller charts, so short-term movements need to be interpreted with caution.

There was a small downwards pull from this and the issue of sharp price changes due to fashion has affected clothing too over time. In fact the establishment have used it to attack the RPI rather than fix the problem.

Looking Ahead

At first it looks as though there will be some relief.

Monthly producer input prices rose by 2.1% and output prices by 1.6% in May 2022, down from 2.7% and 2.8%, respectively, in April 2022.

Whilst there is a slowing here, it is also true that in the broad sweep of things we are not seeing much of a change of beat when numbers of the order of 2% per month are being experienced. The annual numbers do show this I think.

Producer input prices rose by 22.1% in the year to May 2022, up from 20.9% in the year to April 2022; this is the highest the rate has been since records began in January 1985.

Producer output (factory gate) prices rose by 15.7% in the year to May 2022, up from 14.7% in the year to April 2022.


The story of 2022 is of sharply rising inflation and a cost of living crisis. I have long feared this day and its impact on people which is why I have spent so much time on inflation measurement. I am sure that at times people felt that a difference between say 2.1% and 2.6% was splitting hairs but 11.7% and 7.9% will get a very different response. Also there is another swerve in play which comes from saying you are better off if the rate of inflation falls when in fact it means you are getting worse off more slowly. At least those who have been producing “research” to show how inflation is “transitory” have gone quiet. Well mostly anyway





The Bank of England has made the same interest-rate mistakes as the politicians it replaced

Yesterday brought news that will have come as no surprise to followers of my work. One of my main themes is that rather than protect us central banks act to protect the banks ( The Precious The Precious!) and the housing market. Those two are of course interrelated as pushing up house prices not only allows them to claim Wealth Effects but improves the balance sheets of the banks. But the heat has been applied via changes in bond yields which feed through into fixed-rate mortgage costs which are presently some 93% of new mortgages. In 2022 so far the UK five-year yield has risen from 0.81% to 2.3% putting pressure on claims that mortgages are affordable.

Here is how the Bank of England responded.

Following its latest review of the mortgage market, the Financial Policy Committee has confirmed that it will withdraw its affordability test Recommendation. This will come into effect from 1 August 2022.

Well one thing we learn from that is when they expected house prices to fall. But let us remind ourselves of what they had in place.

Introduced in 2014 the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. The other Recommendation, the loan to income (LTI) ‘flow limit’, which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

So the affordability test was only for times when it did not apply? One might have thought that this was most appropriate at a time of rising mortgage rates. I see Bloomberg are quoting the man who wrote a couple of my textbooks when I was at the LSE.

Charles Goodhart, a former rate setter at the BOE, said it’s “an extraordinary moment to relax affordability constraints” and that it looked like the BOE had come “under political pressure” to support government plans to increase home ownership.

Where I think Charles has it wrong is that such bodies are, as explained so eloquently by Sir Humphrey Appleby in Yes Minister, are filled with people you do not need to influence ( as they will do it of their own accord). We can also note that real life veered close to comedy too as of course the banks would be in favour of a relaxation of the rules.

The FPC consulted in February 2022 on the proposal to withdraw the affordability test and maintain the LTI flow limit, with the majority of responses supportive of the proposals

Indeed the comedic element continues as we note the rise in consumer credit in the UK.

The checks were introduced in 2014 as part of measures to guard against a dangerous build-up of household debt.

Another of my themes is in play here if we look at the overall picture. I have long argued that the FPC should be scrapped and it made my case for me yesterday. Just as logically it should be advancing it has decided to beat retreat and it was ever thus. In essence it is just a sinecure for those the establishment wishes to reward.

A Bitter Pill

The still relatively new Chief Economist at the Bank of England Hugh Pill has had a troubled start to his time in his role. This came from getting things completely wrong as this speech from the 26th of November last year shows.

First, to emphasise, I do not see an immediate threat of UK inflation de-anchoring from its 2% target at the policy-relevant medium-term horizon.

Inflation on the targeted measure ( CPI) is now 9% and forecast by Hugh to be 11% so he was completely wrong.

Second (and building on my previous remark), shifting to a stance more reflective of the emerging two-sided risks to the outlook required careful preparation after several years of aggressive policy accommodation.

The risks were in fact entirely one-sided.

Third, my assessment of the inflation outlook rests on a cumulative assessment of the incoming data, seeking to separate the policy-relevant signal embodied in lasting, underlying trends apparent across a wide set of indicators from the noise evident in the month-to-month gyrations of any single indicator.

Whilst he dithered the inflation fires raged.

So what is he telling us today? The quotes are via a financialjuice1


Not much insight there.


Actually that has already happened which confirms the theme of him chasing events rather than getting ahead of them.


I am not sure how much worse the situation could could than it is! However our valiant Chief Economist still seems to be looking for “evidence”. How about going to the shops? That continues the image of a central bank keen to do as little as possible as shown by its 0.25% increase in Bank Rate last week. I will return to this issue in a moment.


Not very hard with inflation at 9% and expected to speed up. Perhaps more revealing is that he felt the need to say that.


They are already here so it is a bit late now.



As that is pretty much what we are facing his image of a Dunian Golden Path falls rather flat.

The exchange-rate

The Bank of England has now been forced to look at one of my themes which is that the exchange–rate of the UK Pound £ matters. Yesterday Catherine Mann told us this.

 I now turn to the global factor: If the Fed tightens at the currently expected pace, and the ECB musters an increase soon, the scenarios outlined above suggest additional depreciation pressure on Sterling that could add to inflation particularly in the near term.

This is relevant as last week the move by the US (0.75%)  was treble that in the UK (0.25%) which I note she avoids in the detail below.

Using the reaction function based on historical data with about a ¼ response to the posited Fed tightening would add about half a percentage point to inflation in the first year.

Then she gets to her point and explanation which puts her into a different camp to Hugh Pill as we compare this to his 0.25% above. Actually it is still less than the move in the United States but would have been closer.

It is interesting that the policymakers that have analysed the value of the UK Pound £ in recent years have both been American with Catherine here and Katherine Forbes in the past.


The Bank of England now finds itself in the situation it was given its independence to avoid. The previous problem was that politicians would shirk difficult decisions thus meaning that they would raise interest-rates too late and thus let inflation rise and then have to raise interest-rates by more to get it back under control. That is of course exactly what the technocrats have done this time around.

There is another irony in that what seems the right decision now may also prove to be wrong. What I mean by that is taking the high road so to speak with some 0.5% interest-rate increases or the Catherine Mann view may after the 18 months or so for it to fully work affect the economy when it is weak. Or be what is called procyclical. That would also be an irony as the Bank of Japan is accused of being procyclical now via its refusal to let any interest-rates rise, but may be right if we look ahead.

The real problem now is that the choices have narrowed due to the dithering by central bankers.  Japan has showed us what happens to your currency if you ignore the interest-rate rises elsewhere by its fall of 23% over the past year. In fact the real fall started at the end of this February when it was below 115 versus the US Dollar as opposed to the 135 now. So I think we have to increase interest-rates for that reason but it comes with a kicker which is another of my themes.

It ain’t what you do, it’s the way that you do it
It ain’t what you do, it’s the way that you do it
It ain’t what you do, it’s the way that you do it
And that’s what gets results ( Bananarama)

If they had acted earlier they could have helped with inflation and supported the UK Pound £. Now only maybe the latter or if you prefer we have come full circle and repeated all the mistakes of the ancien regime.



The energy crisis of 2022 sees coal suddenly back in fashion

A major story and event of 2022 has been the energy crisis which has been one if the main factors in the ongoing cost of living crisis. It is easy to forget ( partly because government’s and central banks are directing us away from it) that there were issues even before the war in Ukraine which has made things even worse. Last week Russia decided to turn the screw a little further.

Gazprom said it had to halt ANOTHER turbine at a compressor station connected to the Nord Stream pipeline, curbing natural gas supply to Europe even more Siemens is performing maintenance on them, but sanctions interrupted delivery ( @SStapczynski )

The situation continued to worsen as the week developed leading the Financial Times to report this.

Russia cut capacity on the main gas export pipeline to Germany this week by 60 per cent, sending ripples across the continent as western officials became convinced that Moscow is weaponising its gas exports in response to EU sanctions following the full-scale invasion of Ukraine.

We can look at the consequences via a country which has had an energy policy regularly praised by the FT which is Germany as we are seeing developments which are extraordinary even for these times.

The Crisis in Germany

The shortage of gas became so acute that the Climate Protection Minister has put out an official statement.

“The situation on the gas market has deteriorated in recent days. The missing quantities can still be replaced, and the gas storage tanks are still being filled, albeit at high prices. Security of supply is currently guaranteed. But the situation is serious. We are therefore further strengthening precautions and taking additional measures to reduce gas consumption.”

There are obvious contradictions because if the gas can be replaced and supply is secure why do we need the statement? In essence the need to reduce gas consumption is the significant part as opposed to his rhetoric. Perhaps it is the translation but the use of “tools” is something central bankers so when things are going badly wrong like they have with inflation.

For months we have been in the process of sharpening tools, creating new ones and removing existing obstacles.

Along the way there is something that we have been worried about since late last year that this will lead to companies and businesses being forced to shut. This is a big deal in a country which is a large manufacturer.

We will reduce gas consumption in the electricity sector and in industry and force storage tanks to be filled. Depending on the situation, we will take further measures.”

The official response has him so embarrassed he sort of tries to slide by without spelling it out.

To this end, power plants that are already available to the electricity system as a reserve are being upgraded in order to be able to return to the market in the short term.

But he is unable to fully do so.

That means, to be honest, more coal-fired power plants for a transitional period.

Some of you may be thinking that there is a more logical alternative.

Germany’s three remaining active nuclear power plants have a capacity of 4 gigawatts and are scheduled to go off the grid by the end of this year. Their lifespan will not be extended as the government has concluded the technical and safety hurdles are too high. ( Financial Times)

Presumably that claim also covers the nukes that were closed at the end of 2021. Whether that is true is entirely another matter as Germany’s Green Party of which Minister Halbeck is a member is anti-nuclear. So it would appear that this option is being willfully ignored.

The six nuclear power plants generated 12 percent of German electricity last year; the final three produce about 5 percent.  ( Politico)

This mornings producer prices release shows the impact on both businesses and households in May.

Energy prices in May 2022 were on average 87.1% higher than in the same month last year . Compared to April 2022, these prices increased by 2.5%. The highest impact on the year-on-year rate of change in energy was natural gas in distribution, up 148.1% from May 2021. Power plants paid for natural gas 241.2% more than a year earlier. Natural gas was 210.7% more expensive for industrial customers and 168.3% for retailers.

So extraordinarily higher than last year and another 2.5% on the month.

The UK

Whilst the situation here is different in that Russian gas pipelines do not flow to the UK and it has turned out we got something right by the switch towards LNG we see that politicians are pack animals just like central bankers.

In May, I asked National Grid to explore keeping 3 coal power stations open this winter, if needed. With uncertainty in Europe following the invasion, it’s right we explore all options to bolster supply. I’m pleased EDF has today confirmed West Burton will remain online. ( Kwasi Kwarteng last Tuesday )

So we are in the midst of something of a dash for coal and contrary to the rhetoric about new nuclear plants I believe that the UK will close one this summer. So we will also turn down the opportunity to maximise what we have during this crisis.

There is another issue where there are copy-cat policies going on if we return to Germany and Minister Halbeck.

We are accelerating the expansion of renewable energies in an unprecedented way,

In the UK Kwasi Kwarteng announced this last week.

Latest data: 10GW of renewable power currently being built; 12GW extra on its way

But you see these things are effectively innumerate. The UK has about 25 GW of wind power capacity but that is producing only 4.5 GW as I type this and it is forecast to decline as the day progresses and be even lower tomorrow. So assuming all the hype above is true then we would be getting 4 GW from it rather than the 22 GW stated. The fact that it ebbs and flows gets ignored.

The UK has a relatively stronger position in that it does produce some of its own gas and oil and energy minister Greg Hands is apparently keen to point that out.

Operational since 2001, @TotalEnergiesUK‘s Elgin Platform in the Central North Sea produces 5% of the UK’s gas demand. Fantastic to visit today and understand its key role in UK energy security now and in the future.

The US

The US is in one of the strongest positions of all in terms of overall energy resources but as Javier Blas points out this is breathtaking.

White House Press Secretary calls on US oil refiners to lower gasoline prices: “We see it as a patriotic duty […] We are calling on them to do the right thing”

The Biden administration started in office bu blocking fossil fuel plans but seems to expect the oil industry to invest it in. This from former head of the US Federal Reserve Janet Yellen is just as bad.

Refinery capacity is declined in the United States and oil production has declined. I think that producers were partly caught unaware by the strength of the recovery in the economy and weren’t ready to meet the needs of the economy.

This was until recently US government policy….


Before this recent phase the world was already having energy issues. We have been told that crude oil is about ti run out many times in my life. But that has developed into an issue created by the fact that the easier and cheaper supplies either have been or are presently being used. To that we have seen a push for sources of power which are unreliable and then to claim it as a triumph.

 Professor John Mathews of Macquarie University in Australia, looks back on what Germany has achieved so far with its unique energy policy and concludes that it has been a spectacular success, whatever its detractors may say.

That was from October 2017 and we can now file “spectacular success” in my financial lexicon for these times. Also the COP26 agreement to end coal has morphed into this.

we know now that coal demand will hit a record high in 2022, and likely another one in 2023 ( Javier Blas)

As it happens the UK is burning coal today to produce some 0.5 GW of electricity which it looks like we are exporting to France.

Energy policy is an utter mess where our political class have utterly failed us but keep doing this.

I’ve been getting away with it all my life (getting away) ( Electronic )


Japan stands firm against the tide of rising interest-rates

The central banking news has come thick and fast this week.We knew from the schedules that several meetings were due but as we looked forwards we did not necessarily always know the importance.One thing we have definitely learned this week is that my theme that central bankers are pack animals continues but that they have split into two distinct packs and today we are looking at the one which involves both Japan and the Euro area.

Bank of Japan

Policy here has been under threat as a hedge fund has been taking on the Japanese Government Bond market by selling JGBs and looking to get the ten-year yield above the 0.25% limit imposed by the Bank of Japan. Blue Bay have posed a direct challenge to Yield Curve Control and had some success as the yield target was breached earlier this week and the Bank of Japan was forced to buy 2.2 trillion Yen of JGBs to reinstate it.

Yesterday the temperature was heated up by reports like this.

10Y JGB yeilding 0.45%, “coups d’état” on Kroda inside the BOJ right now. ( @ForexSmile )

Firstly it is Kuroda and secondly that always looked like a bum print from Trading View. Those running with such thoughts will have run into this today and the emphasis is mine.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero
b) Conduct of fixed-rate purchase operations for consecutive days
In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

So The Tokyo Whale really intends to live up to its name. As the Keiser Chiefs put it.

Knock me down I’ll get right back up again
Come back stronger than a powered-up Pacman

Following the statement Governor Kuroda has sounded like a man who is digging in the trenches rather than planning to leave them.


Then even more so.

BoJ Gov Kuroda: Raising Implicit Cap For 10-Year JGB Yield Target Would Weaken Economy ( @LiveSquawk )

And then finally via forexlive

BOJ’s Kuroda says will not hesitate to ease monetary policy further if necessary.

Actually he is hyping things up there because the Bank of Japan is heavily involved in buying bonds ( QQE) and Japan Inc was never keen on interest-rates going below -0.1%,because if they were it would have done.

Early Wire?

One of the dangers of central planning is that some end up being more equal than others. I point this out because other bond markets rallied yesterday afternoon. Whilst it may have been reasonable to guess what the Bank of Japan would do it was a strong move in the reverse direction to the volley of interest-rate increases that we had seen this week.


The Japanese situation is different to others in many ways but the big difference right now is this.

On the price front, with the effects of a reduction in mobile phone charges dissipating, the year-on-year rate of change
in the consumer price index (CPI, all items less fresh food) has been at around 2 percent, mainly due to rises in energy and food prices.

The statement rather confusingly excludes and then includes fresh food! But so far Japan has what both its central bank and government wants which is inflation at 2%. Care is needed with this on several fronts. Firstly there are the power problems we have previously looked it which may push it even higher as we enter the air conditioning ( it gets very hot and humid) season. Also Governor Kuroda has already felt pressurised enough to apologise for higher inflation. Lastly it is my opinion that rather than being a solution to the lost decade problem it will make it worse via the impact on one of its main features which is the struggles of real wages.


The messages coming out of the ECB are to say the least confused. That is a little awkward for President Lagarde who of course has just received an honorary doctorate, but promised at the start of her reign to end the squabbles and leaks leading to “sauces” in the media. But the ECB does have a direction of travel and that is in line with today’s command and control theme.

European Central Bank President Christine Lagarde told euro-area finance ministers that the ECB’s new anti-crisis tool will kick in if the borrowing costs for weaker nations rise too far or too fast, according to people briefed on their discussions.  ( Bloomberg)

She then went further down that road.

She said the instrument may be triggered if bond spreads widen beyond certain thresholds or if market movements exceed a certain speed. Lagarde did not specify whether those limits would be made public.

Maybe someone should have told the Governor of the Bank of Italy not to tell anyone about the limits.

“A differential in the yields of 10-year Italian and German bonds of less than 150 basis points would be justified by the fundamentals,” Visco told a conference. “Levels above 200 points are certainly not.” ( Reuters )

It is right on the upper limit as I type this (2%) but the confused messaging led to a lot of trouble in the German bond market yesterday. The view got around that there could be selling of German bonds to buy Italian bonds so that the ECB could claim its moves were neutral. There are issues with this from the German point of view for obvious reasons highlighted by their bond future falling by 4 points at the worst point of the panic. So some will have been stopped out of what is supposed to be the safe haven of European bond markets. So genuine losses were created by the confused messaging. Actually it is more than the messaging as the plan is merely a wish list at this point.

So we see actual losses created by the involvement of the ECB and frankly policymakers who know nothing about bond markets. Supporters of such policies dismiss this as being about speculators and even “financial terrorists” ignoring the fact that people’s pension funds are involved here.


Who is she to define bond market moves as “irrational”? She of course has plenty of experience of crises which sounds good until we recall her role in creating them.

Meanwhile this particular salmon seems to be trying to swim in the other direction.


Just as a reminder here is the total increase in interest-rates in the last decade 0%.


We end what has been a tumultuous week with central banks having split into two packs. Indeed you could argue with its interest-rate open mouth operations that the ECB is trying to keep a foot in both camps as well as sometimes one in its mouth.

The present leader of the pack is the Bank of Japan which demonstrated irs devotion to the cause by buying some more equities today.


For them it is always Queen on the loudspeakers.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me