The effect the Egyptian crisis has had on financial markets and UK Producer Price Inflation surges again

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.


14 thoughts on “The effect the Egyptian crisis has had on financial markets and UK Producer Price Inflation surges again

  1. Shaun I think I your final comment hits the nail on the head.Central Bankers,Bankers and Politicians all want to get back to the comfy debt dependant growth model.They simply cannot grasp that train headed to Default City left in 2008.

  2. It’s refreshing to see that there are people with some integrity in the system. I see one of the Federal Reserve governors stepped down yesterday as well. Trouble is, once they step down, they no longer have any influence – even if they left with (some of) their integrity intact.

    Shaun do you think the Euro and the dollar can survive their “credibility crises?”

    • Hi Alex
      The problem with currencies at this moment in time is that as you look around the world’s main currencies they all have “credibility crises!” If we take the 2 that have been en vogue the Japanese Yen and the Swiss Franc they have been driven to levels which must be uneconomic for the underlying real economies. We have our problems in the UK too. We know about the dollar and the Euro.

      So there in a nutshell is a currency traders problem, a height contest amongst pygmies. The IMF has come up with a solution which,surprise,surprise is to enhance its own currency the SDR. But my view of the IMF is that its finances are built on sand.

      I am not sure of the exact nuance of your question but the $ will remain the US currency and it will take something quite fundamental to change it’s role as the world’s reserve currency. However my ex-colleague with his charts does worry about a real drop in its value ( Take 2 versus the £, then 3 then 4) as one scenario over say a couple of years. That would challenge its reserve role.

      Logically the Euro has to change in some form it is only a question of time.Whilst the Eurocrats are pressing for more fiscal union,often via the backdoor such as the EFSF, it will still require the willingness of the richer nations to finance the fact that the obvious candidates cannot cope with a single interest rate and a single exchange rate. So if we project that forward for such a strategy to work we need the can to be kicked forward into a more favourable economic environment. So the slower and weaker the recovery the more danger there is for the Euro project. At Thursday lunchtime Portugal was on her way to going “man overboard”. Should she do so then it will be as Winston Churchill put it ” It is not the end, it is not the beginning of the end, but it is perhaps the end of the beginning”. For then we get to Spain……

      • Thanks Shaun for a comprehensive answer. The nuance of the question was really that I’ve been reading some quite scary stuff predicting that the effects of the US (and many others’, but they seem to be the biggest) national debts being so high leads to only one likely outcome – soft default by inflation.

        That sounds a bit like your chartist ex-colleague’s scenario doesn’t it? It would be hard to maintain reserve currency status if the value of the dollar slipped quickly.

        The Fed’s QE programs seem to make the BofE’s QE seem very reserved (pardon the pun).

        • Hi Alex
          Ah ok. In essence I think the debate will move onto central bank exit strategies. I have a section on Quantitative Easing where I doscussed this in detail. It is a theme of mine (like for example that I have argueds since I started my blog that the UK has an inflation problem) that central banks operated extraordinary monetary measures and asset purchases with no concrete plan how to reverse them. I discussed this a lot in relation to the UK. I have discussed it less recently partly because the Bank of England has gone quiet on the matter (which is revealing in itself) and also because in my opinion it will rear up again when we have a sustained recovery…. If you like I have marked the ground and am awaiting events…

          With QE2/QE Lite the Federal Resrve did have a slight nod to this. It rolled mortgage backed securities into treasuries (US government bonds) with QE Lite and is buying shorted dated bonds than expected by many with QE2. Of course the first effort merely kicks the can into another market and the second relies on waiting for the bonds to mature but there is a glimmer of a plan rather than none. In my view much more of a plan is needed and it should have been ready before QE ever began. For me this is the type of scenario which could challenge the $’s role.

  3. Shaun,
    Does it matter any longer for the broader economy whether the MPC uses its policy ‘lever’ of raising bank rate or not? This official rate seems increasingly detached from the real world as experienced by businesses and consumers. Isn’t the low official rate now just a subsidy for banks, with no broader economic impact?

    • Hi Ian
      I believe that it does matter. Whilst the importance of bank rate has declined some interest-rates are either fixed to it or will vary with it. Also if you look at economic history nations that have been successful have operated their interest-rates promptly and decisively. Their action had a subjective as well as an objective influence. Now whether you can that Keynes’ “animal spirits”, a type of psychology or credibility in action but it did appear to happen.

      I agree that the official rate is in many respects detached from reality. One of the ironies of using a Zero Interest Rate Policy or ZIRP is that you make interest rates ineffective and it still surprises me that its advocates did not think it through properly.One of its features is indeed a favourable situation for a bank. My argument for raising rates to 2% is not that in itself it would solve our problems but it would help a little at the margin and would put us in a position where interest-rates were more realistic in terms of a saver/debtor balance as well as meaning that further interest rates moves would be effective.

  4. “perhaps the Monetary Policy Committee would be kind enough to tell us if there are inflationary signals which would make them act.”

    Wage rises for you or me (assuming that we are not members of the politico-corporate elite).

  5. Hi Shaun, “In reality the situation is in fact worse than this as the numbers have been “recalculated” by the ONS. ” Indeed, but it is not the first time they have used these types of tricks, particularly to re-index the effective datum! Far from it.

    You seem to be coming closer to my position that these official numbers mean increasingly nothing relative to reality. They have now become fake numbers published by part of the present UK Ministry of Truth, as propaganda deliberately manipulated and distorted so as to attempt to gravely mislead the electorate, for political purposes.

    As I have pointed out previously, the two elements required for the confidence trick of government inflation financing, to fund political profligacy, are fake propaganda inflation numbers (grossly understating reality) and excessive government spending (above revenue from taxation), part of which is fulfilled by issuing new money form (of one kind or another), so as to debase the fiat currency. Dishonest politicians in a democracy need this combination so as to be re-elected. If they generate the inflation to fund their profligacy without the fake numbers to deceive, they will find it almost impossible to form the next government.

    Politicians do not play the game according to the economic rules! They make their own rules, and their rules often destroy the rest of us.

  6. This site offers some of the sharpest analysis around; I just wanted to add that to the praise of the other commentators. We have been heading to a monumental stagflation for three years now, and putting it off and putting it off. What you describe is the emergence above the water, as it were, of what has been held beneath–it really is a sad and frightening prospect, particularly as things have been so mismanaged.

    Keep up the good work–this site is worth a thousand newspapers!

  7. Hi Shaun,
    This ‘one off’ argument has been rumbling on now for the last few years. The problem is credibility and the dichotomy between theory and practice.

    Most of the people you hear are academics and the more you hear them the more you realise how far away from reality they are. I just picked up another fact from Steph Flanders’ blog.

    The new data show the trade deficit for 2010 was a record £46.2bn, up from £30.0bn in 2009. As a share of the economy, the goods deficit – at around 6.7% of national income – was also higher than it has ever been.

    Worryingly for the Bank of England, this was partly due to rising import prices – which seem, if anything, to be picking up pace. Import prices rose by 1.5% between November and December, and are more than 7% higher than a year ago.

    This is getting even more serious given that China, India are vigorously raising rates and that can only mean higher imported inflation. Given this background; the ultimate fear is if the bank has to resort to multiple 0.25% rises over consecutive months the proverbial will hit the fan causing massive problems in the UK.

    History shows they have been behind the curve and this time it is no different. Next you will hear the classic ‘We didn’t see that coming’, ‘City Analysts were surprised with the figures’, etc. The sheer hubris and irrational exuberance is shocking to say the least.

    As usual I enjoy reading your blog because of the analysis, sharp insight and the other point of view.

    • Hi Bebedi
      Welcome to my blog and thanks for the compliment. I think that the innovation of an economics blog on the BBC website was a good idea and hope it provokes more of an interest in the subject.

      As to the figures well commodity price inflation has been a theme on here for quite some time… And for the trade figures I am relieved the days where I sat either at a trading desk or on a trading floor waiting for the US trade figures at 1:30pm are long gone because no monthly trade figures are accurate enough for that. Are annual ones reliable? Not really but we do seem to be back with some bad habits but how bad remains to be seen.

  8. Stagflation, here we go!
    Our politicians and none-too-independent officials are playing the usual game, as mentioned above.
    How long before events force a large rate increase? And will that pull the clip on the wage inflation hand grenade?
    I fear we are heading for a re-run of the 1970’s, only with huge levels of personal debt as well as state borrowings at a very high level.

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