We are experience what I believe will be something of a nexus event and it is already in play. There are two issues in the initial phase which is the rise in the cost of energy which in the UK had its first instalment in domestic energy terms on Friday and next concerns over whether there will be actual power cuts. As to the latter implied power cuts are now baked in. The first type where industry finds it too expensive to produce has already happened in some places. For example the CO2 shortage which of course was an irony in itself was driven by that. As power has got more expensive in the meantime that will be happening on a a wider scale.Next comes industrial companies being asked not to operate at certain times. Like for example on cold still days when we have little or no output from the UK wind farms. It would not take much more for that to spread to the domestic consumer whether by price via the real use of Smart Meters or by actual cuts.
This morning’s consequence is shown below.
GAS MARKET: In early trading, European natural gas contracts opens sharply higher as temperatures start to drop over Europe. Benchmark UK NBP and Dutch TTF are up another 12-15%, after gaining about 20% on Tuesday. Both are setting all time highs ( @JavierBlas)
This is posing all sorts of issues and flowing into other markets as well. From The Spectator Index
Brent crude oil price 1st of May: $67 1st of June: $70 1st of July: $751st of August: $72 1st of September: $71
Now: $82.5
So up again on what we noted yesterday which just reinforces the problems for the energy importer Japan. But at a time like this even daily updates do not last.
European natural gas benchmark prices climb more than 20% now to fresh record high (both UK NBP and Dutch TTF). A complete train wreck. ( @JavierBlas )
Now let me switch to the consequences of this so far.
Economic Output
The path for this has been shifted lower. We have already noted the impact of higher prices and energy intensive industries such as steel and cement must be reeling. The Energy Information Agency has a list.
Food Food, beverage, and tobacco product manufacturing
Pulp and paper Paper manufacturing, printing and related support activities
Basic chemicals Inorganic chemicals, organic chemicals (e.g., ethylene propylene), resins, and agricultural chemicals;includes chemical feedstocks
Refining Petroleum refineries and coal products manufacturing, including coal and natural gas used as feedstocks
Iron and steel Iron and steel manufacturing, including coke ovens
Nonferrous metals Primarily aluminum and other nonferrous metals, such as copper, zinc, and tin
Nonmetallic minerals Primarily cement and other nonmetallic minerals, such as glass, lime, gypsum, and clay products.
They may also be asked to stop producing although for certain areas such as food I am sure you can see the problem. So it does not look as if there will be much growth to go around and maybe another decline.
Inflation
The path for this now looks set to soar. The October inflation figures will reflect the domestic energy price rise from the start of the month. But looking ahead it is plain that there will have to be another rise next April. It could easily be double the size of the one just seen. There will be other price rises in the producer price numbers of which the most obvious will simply be the higher price of crude oil in the input numbers. Later the output numbers especially for the energy intensive industries we noted above will rise as they try to cover their costs.
In terms of domestic inflation I have pointed out before that we are in for a period where the Retail Prices Index (RPI) will go above 5% and now I say the same about 6%. Frankly if these level of gas prices remain it could be 7%. This is an utter failure by the Bank of England which will be burning the midnight oil to find some excuses for this. A little care is needed because they did not explicitly push energy prices higher nor would an interest-rate rise reduce them. But they have done everything they can to raise inflation into an inflationary boost as in they have pursued exactly the opposite of their claimed mandate.
They thought they were being clever pushing demand back to pretty much normal levels but made no note at all of the issues for a supply side still suffering from a Covid hangover and assumed it would bounce back like a rubber ball. These have been international as this from the German industrial orders numbers earlier shows.
The manufacturers complain about delivery bottlenecks for preliminary products.
Thus we got inflation and a particular bottleneck has been energy supply. Yes the same energy supply that the central bankers have just interfered in as they move onto climate policy. It is the only occasion where they have their timing right except they had the chart upside down.
Interest-Rates
These are on the move but in the obvious version there is a catch. This was exemplified early this morning from the Reserve Bank of New Zealand.
The Monetary Policy Committee agreed to increase the Official Cash Rate (OCR) to 0.50 per cent.
On a lighter note I was expecting this after the All Blacks lost at the weekend. But more seriously it is both too small and too late in their own words.
Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term.
Best of luck with the latter point by the way.
Bond yields are also rising with the UK ten-year yield now above 1.1% which poses yet another question because central banks have been making it cheap for governments to borrow. Overall that is still true but relatively the price is edging higher. The UK fifty-year yield is now 1.32% and I guess those in authority are regretting ignoring my advice to issue some 100 year bonds whilst it was cheap.
Comment
Let me offer some calm. The extreme moves at the moment look like a “financialisation” of the natural gas market where traders look to have been net short and are being forced to pay and really pay to get them back.This is also affecting the power companies who feel they have to buy. So that should calm down as will the extreme prices. But underlying this are some serious problems and the most obvious is the way that the dash for renewables was so ill thought out. I have been to many meetings where the main discussion point has been Margaret Thatcher but have been left bemused by the unwillingness to accept my point that her worst decision was to close the coal mines. That has been added to by the closure of coal power stations which we could do with now. The is a type of bipolar thinking as we apparently can do all sorts of technical things with renewables but cannot with coal. Of course much of the former has crumbled in this episode.
Next comes the institutional failure and let me concentrate on the central banks who got their main job which was supposed to be inflation control completely wrong. Also they thought it was a free lunch providing cheap bond yields for governments. But now savers will see an extreme form of financial repression with inflation at 6% and interest-rates at 0.1%. It will be different this time crumbles again….
I fear for the poor through this who at best at going to struggle to heat their homes through this winter even with my optimistic viewpoint above. Meanwhile the Bank of England has filled its pension fund boots with bonds based on the RPI inflation index it has done nothing to defend for everyone else. In fact quite the reverse under the hapless absent-minded professor Ben Broadbent.
Notayesmanseconomics's Blog 
I am afraid this has been on the cards for years, successive governments have deferred decisions on nuclear power for decades leading to power shortage. If you close the coal mines, you need to replace them with another power source – simple.
We now find ourselves with higher inflation, recession and higher interest rates.. Next will be increased mortgage costs and house price falls – negative equity again.
Are we about to see the disaster that you and this blog have predicted for months, if not years?
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Maggie standing up to the coal miners was only half the battle it seems. But I do find it astounding the change of heart wrt nuclear power. Back in the 80s is was very much frowned upon; fast forward 40 years and newer building and fusion technology, nuclear becomes a potentially acceptable energy source.
I do worry for the UK this winter. I forsee unrest.
Some thought negative interest rates would be on the cards including myself, how things can turn in just a few months.
However higher inflation was to be expected because of bottlenecks and a surge after lockdown so I am still cautious on inflation in 6 months time.
Surging energy costs could halter growth however and that in turn could inflate in turn.
Interest rates can rise or fall at a whim; we have seen the elite ignore, time after time, its self-set conditions for interest rate rises; don’t kid yourself that ANY amount of inflation will change interest rate policy.
With Bojo wanting employers to increase wages inflation could rise more than 5% and there is press comment about the minimum wages going up. This will push up consumer goods. More inflation higher property prices there is a limit when the BOE will have to increase interest rates. I
I see a lot of red flags at the moment higher interest rates could cause an asset price crash.
Name that limit.
The main purpose of interest rate rises is to take the heat out the economy & curb inflation.
I think it’s pretty obvious that the govt. wants as much inflation as it can possibly get away with.
Wage inflation, even if it does push house prices higher, also makes existing mortgages more affordable.
As for taking heat out of the economy, well the govt. would argue that, after 18 months of covid-restricted inflation, an expansionary economy is just what we need, & wallow in the tax returns.
Does anything in this post sound anything like unreality?
Andrew Bailey: Sorry PM inflation is 3.4x target.
BoJo: You’re a very naughty boy, here’s a hundred grand payrise.
Hi therrawbuzzin
Well the Governor does have form in this area. After all when he set out to reduce overdraft mortgage rates he doubled them! Soon he will have done the same with inflation vis a vis the inflation target.
At the last count we had about 400-600 years supply of some of the best quality coal on the planet located underneath the United Kingdom.
If we want to deal with climate change we are going to have to keep the population at or below current levels and suck CO2 out of the atmosphere. We can clean up coal a bit and collect CO2 we are short of for food packaging etc.
Or we go full on Nuclear Fission.
Or the always 10 years away Nuclear Fusion happens.
and in number from 2018 I see :-
The UK has identified hard coal resources of 3 910 million tonnes, although total resources could be as large as 187 billion tonnes. There are 33 million tonnes of economically recoverable reserves available at operational and permitted mines, plus a further 344 million tonnes at mines in planning.
Our coal reserves will last longer than 400 years as HMG is hostile and intends to cease coalfired generation by 2025.
A harsh winter will no doubt bring reality to them and the people
Forbin
There are billions of cu.m. of gas West of Shetland that would keep us warm for a century, but the misanthropic extinction rebellion campaign against bringing it ashore.
I serviced my generator yesterday & have 35 litres of e5 (roughly enough for 7 days @ 16hrs/day
Hi Guys
I think it was Tony Blair who spoke about joined up government. Well this lot will be mulling that when someone in authority spots this.
Forbin, that’s fascinating. I really didn’t know that the UK’s remaining coal reserves were so extensive. After reading Lynne Bowen’s wonderful book, “Three Dollar Dreams”, a history of coal mining on Vancouver Island in the 19th century, I visited the site of one of the mines that had been shut down early in the 20th century. From the pictures of it in her book it looked like a dark satanic mill if there ever was one, something that would always be a scar on the land and could never be reclaimed. When I visited, it looked pretty much like virgin forest. Only the historical plaque at the site indicated that a coal mine had once been there. I’ll never forget it.
The last coal mine on Vancouver Island, near Campbell River, where I have some family living, closed down in 2016, the victim of low coal prices according to the mining company. I don’t know what the remaining coal reserves on the island. I doubt they compare with Britain’s. Just the same, there are still potentially commercially viable reserves left there, and the mine that shut down in 2016 could reopen one day. I notice the Canadian Broadcasting Corpn story on that closure had as part of the headline “marking the end of an era”, suggesting that no-one should even think about any more coal mining on the island. That was just at the start of Justin Trudeau’s Reign of Error, but the pattern was already set. I don’t think a harsh winter will bring many people back to their senses in Canada. Too many people have drunk the Kool-Aid.
On Monday I posted about the uncanny “coincidence” between the PM’s & the WEF’s “difficult transition.”
Just another coincidence, “BUILD BACK BETTER” the motto of the globalist dictatorship, upon which we won’t be invited to vote, as backdrop to the governing party’s conference.
Face it, we no longer have a UK govt. we are being ruled from Davos.
Waken up,! The the globalist dictatorship’s Great Reset is upon us!
Bring back garotting
Carrie is the best Labout PM we ever had , and dressed in red too !
what a give away!
Forbin
Crude prices expected to go even higher because world returning to new normality and need more energy for this.
it will be interesting as US oil production has not recovered , some output look perminately lost
Even if oil price rise it takes time for new production , nobody want to invest with Biden at the helm . Too much talk of restrictions and taxes = uncertainty .
never good
Forbin
Putin has offered to stabalise gas markets
https://uk.investing.com/news/commodities-news/putin-offers-to-stabilise-gas-markets-on-an-absolutely-commercial-basis-2478979
Makes strategic sense to use Russia’s gas whilst we have our own supplies.
My wife runs a scrapbooking supplies company. She has been running it for fifteen years.
Being an IT geek, I help with the bulk uploads of products to the company website. I see the wholesale and retail prices and too and I’ve been shocked over the past four to five weeks seeing how large some of the wholesale price increases are.
I’ve seen five suppliers increase their wholesale prices (and r.r.p.’s) between 18% and 55%, mostly towards the higher number. This is not just for new products, but is also for all of the old products too. As a result of this customers are buying up the existing stock like crazy, as in effect they’ve just indirectly been given a huge discount now they’ve seen the new retail prices from the suppliers.
I’ve never seen price increases anything like this ever before, which of course will be permanent.
Hi Rob and welcome to my corner of the online world.
Thanks for the numbers which will be somewhere between the input and output ones in the producer price series. It looks as though it has created another form of supply shortage as well.
I should have put in the piece that policy has created another form of boom and bust.
TESCO is rubbing its hands today with healty profits and 5% margins but at the same time its only prepared to give a pay rise of 2.7% which is well below “real” inflation
https://www.msn.com/en-gb/money/other/what-tesco-s-bullish-results-tell-us-about-the-outlook-for-british-business/ar-AAPcSRu?ocid=msedgntp
If they arent careful employees will find better jobs, greed comes to mind.
Hi Peter
That does seem mean especially for the lorry drivers who are in much demand right now. As to the staff I hope they get a discount otherwise they may be struggling to buy food from their own employer.
“Its chief executive Ken Murphy also moved to soothe worries about rising prices ahead by insisting till costs for consumers also remained down on a year ago following comments from chairman John Allan just last month that food prices were facing a rise of around 5% over the winter.” ( Sky)
Great blog as usual, Shaun.
With regard to “the closure of coal power stations which we could do with now”, my own province of Ontario got rid of all of its coal-fired generating stations, which were largely fuelled by coal imports from the United States and other parts of Canada, when the previous Liberal government was in power in our province. It sent our electricity prices soaring. The attached document by Ross McKitrick and Elmira Aliakbari argues that the benefits from the switch from coal-fired to natural gas-fired generating stations were grossly exaggerated, especially the benefits in terms of reduced health costs. It would have been much more cost-effective to install scrubbers in the existing coal-fired plants than phase them out, which was in fact being done before the phase-out decision was made. This is still an active issue in Alberta, where there are still coal-fired power stations, as well as operating coal mines.
Click to access did-the-coal-phase-out-reduce-ontario-air-pollution.pdf
Hi Shaun, the RBNZ said its objective is to support sustainable house prices. How a 0.25% rise in the OCR will do that I’m not sure.
With a rocky road ahead dealing with the Delta outbreak maybe they should’ve waited a little longer, it is too little too late from an inflation standpoint.
Just in case you feel you can vote to avoid the the globalist dictatorship:
https://www.laylamoran.com/build_back_better
Your vote isn’t worth the paper it’s written on. Only by extra-parliamentary action can we resist.
Bring back garotting!
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