If history is any guide than it tells us that autocrats rarely go easily and on this basis perhaps the news media should have been more suspicious of the claims that President Mubarak of Egypt would resign yesterday. I did listen to the speech or rather a BBC translation of it and it was apparent very quickly from the phrasing that he wasn’t about to go making me wonder again about “experts” and their predictions! Actually the speech droned on somewhat and I would have been more than happy to return to the preview programme for the 6 nations rugby which had been interrupted. Today,however is a different story as we await the response of those looking for change and many eyes and ears will be on the events in Cairo Square, let us all wish those there good luck. If things turn ugly again as they might,luck will be needed.
If we look at the cross currents between Egypt and world markets we can see that many have taken events calmly. For example equity markets have ebbed and flowed a little but for example the US Dow Jones equity index closed at 12,229 which is still very close to its post credit crunch high. There has been a small rise in the dollar exchange rate which is measured by the trade weighted dollar index rose by 0.3% overnight to 78.55, but again this is not especially volatile. Even if we look at the oil price whilst prices have rallied by around 1% overnight things seem calm. However we still have the wide divergence between West Texas Intermediate at US $87.61 per barrel and Brent crude at US $101.79. If anything it is widening.
What about the cause of the unrest in Egypt? Commodity and food prices
Here we see a continuation of the main cause of the unrest. The Commodity Research Bureau (CRB) spot index rose yesterday by 3.05 to 564.94. There was particular action in the price of cotton of which Egypt is a producer which rose by just under 4% on the day and has doubled since last summer. If we move on to the main influence we see that the foodstuffs sub-component rose by 5.97 to 499.31 for an increase of just under 25% since late November 2010. This has been quite a surge and just to illustrate the impact on the poor who are more likely to consume the staples let me show you the components of the foodstuffs index.
Butter Cocoa Corn Hogs Lard Soybean Oil Steers Sugar Minneapolis Wheat Kansas City Wheat
The Problem with UK inflation
After writing yesterday about the British Retail Consortium’s report that shop prices were rising in the UK I spotted another measure tucked away in the report. They also have a measure for basic foods/essentials and this measure which comprises such essentials as bread, pasta, and packets and tins of food shot up by 2.7%, pushing the annual inflation rate to 6.3%. This is the highest rate of growth for this measure for five years. So we are seeing a clear response in UK prices to the commodity price increases I have described above.
UK Producer Prices surge again
We keep being told by the Bank of England that increases in inflation are “temporary” and due to “one-off” factors. They have not been alone as many economists have also supported this position. This mornings release from the Office for National Statistics will give them yet another headache.
Output price ‘factory gate’ annual inflation for all manufactured products rose 4.8 per cent in January 2011.
Input price annual inflation rose 13.4 per cent in January 2011 compared to a rise of 12.9 per cent in December 2010.
Month on month the output prices measure for all manufactured products rose 1.0 per cent between December and January
Month on month, the input prices measure of UK manufacturers’ materials and fuels rose 1.7 per cent in January
As you can see the output measure’s annual growth is in line with the level recorded by retail price inflation and above that of our consumer price inflation measure.So it indicates a possible acceleration in our inflation on the official measure. This is reinforced by the monthly increase of 1%! This deserves the title of a surge. On the month, nine out of 10 categories of output prices increased, with the gain led by food, petroleum products and chemicals and pharmaceuticals.
Those of a nervous disposition might like to sit down before they consider the implication of an acceleration in the annual rate of input price inflation from 12.9% to 13.4%. Whilst you are sitting down you might like to project ahead the implications of a monthly rise of 1.7%. Either the rate of output price inflation is going to have to rise or the profit margin of UK production/manufacturing is going to be squeezed (or a combination of the two). Neither is a welcome outcome. The increase was mainly caused by rises in the price of crude oil, other imported products and imported metals.
This picture looks grim for future inflation and is a counter-point to the decision of the Bank of England not to raise interest-rates yesterday as they would have been told these figures. Rather than reciting phrases such as “temporary” and “one-off” which have so subverted the definition of these words to make them meaningless perhaps the Monetary Policy Committee would be kind enough to tell us if there are inflationary signals which would make them act.
In reality the situation is in fact worse than this as the numbers have been “recalculated” by the ONS. I wrote on the 19th of November, the 14th of December and the 14th of January about a change in the way that the ONS calculates these figures. My conclusion is illustrated below.
This seems innocent enough but I have looked at the numbers for 2010 and this is its impact on the headline output number for produced price inflation for the months of this year so far. They are -0.3%,-0.4%,-0.5%,-1%,-0.5%,-0.7%,-0.8%,-0.5% and -0.6%.
I will leave you to draw your own conclusions! Official recalculations of inflation figures leading to a fall in reported inflation lead to a reduction in the credibility of the figures. Looking at the previous trends for this my calculations lead me to believe that on the old basis we would be reporting output price inflation of 5.4% this month and input price inflation of 14.2%.
There is a section in the Financial Times where economists can post such thoughts and I did post my views on this matter there. Frankly it attracted little interest. I guess it is much easier to report on published headline figures than it is to sit down, read whole documents,think, and try to calculate if they are the correct numbers.
UK economic growth in January
An addition to the recent debate over UK economic growth figures was provided yesterday by the National Institute for Economic and Social Research (NIESR).
Our monthly estimates of GDP suggest that output declined by 0.1 per cent in the three months ending in January after a fall of 0.5 per cent in the three months ending in December………Care should be taken when interpreting the figures since they are distorted by the impact of the adverse weather at the end of last year.
If we deal with this step by step it is apparent that January might show a slowdown and we are back to the argument about whether this was snow/weather related. For those of you who feel that the second part of the first sentence represents a fundamental change in their figures I have spoken to the NIESR this morning and they helpfully explained that they put official figures on this record as it is a monthly measure they calculate then use the official figures. They feel that today’s construction figures will help their original case but construction is a relatively small part of our economy so the debate goes on!
Portugal’s financial problems escalate
It turned out that Portugal’s government bond market fell heavily and quickly yesterday. So fast that before lunchtime its ten-year maturity was yielding more than 7.6%! This rate of rise would have had her government calling in the IMF so the European Central Bank had to fire up its recently deactivated Securities Markets Programme and begin buying again. There was maybe a casualty from this as the President of the Bundesbank Alex Weber had declared only a day before he would not serve a second term which also ended his chance of becoming President of the ECB. Coincidence?
Well perhaps not when you realise that the Portuguese had on Wednesday undertaken a syndicated bond issue of five-year stock which had been kept rather quiet and was left off the debt website until after the event. Sneaky! We have seen before what some had lauded as “financial innovation” and invention had done to Ireland but as ever little had been learnt. Compared to the previous auction in January of five-year stock the yield required rose from 5.54% to 6.67%.Worse than that by the end of the day the price had dropped by more than a point from the initial price of approximately 99. Things were going badly and I wonder if Europe’s politician’s ordered the ECB to fire up the SMP to start buying Portuguese debt. The main opponent of such a policy has been Alex Weber who has decided not to stand again…….
So we are back to a market which could not be more false as the only buyer is the ECB. I would remind you that such market-fixing would be illegal if done by you or I. Also as the ECB already was estimated to own some 20% of Portugal’s national debt it must be accumulating ever larger losses. I asked once before if it was in effect insolvent and would advise the taxpayers of the Euro zone to pursue this matter further as one day they are likely to be getting the bill!
Rather oddly a Portuguese Minister agreed with me as he called for something to “return markets to normality”. Sadly such is the abuse of language these days I suspect he really meant abnormality.