– Employment figures today
Good morning. The Daily Mail runs a feature this morning about “How your Christmas dinner has travelled 260,000 miles”. No, it is not about migratory turkeys or Martian satsumas. It tots up the 4,486 miles travelled by the smoked salmon from Alaska, the 3,284 miles covered by the American cranberry sauce, the Brussels sprouts’ 222 mile journey from, er, Brussels, the 463 mile journey of the potatoes from Scotland, etc. Add them all together and it ends up as a very big number. Of course it’s a specious argument. According to that sort of arithmetic the people on the train this morning travelled 86,400 miles, half of them standing up all the way.
The Bank of England uses similar sophistry to explain why inflation is not as high as people might think. Strip out the effect of food and energy prices and the “core” consumer price index (CPI) went up by just 2.7%. Remove the impact of January’s VAT increase from 15% to 17.5% and you are left with an inflation rate of about 1.6%. Nothing to see there then. Move along now, move along. Except nobody in the real world is looking at a 1.6% inflation rate. They are not even looking at the 3.3% suggested by the narrowly-based CPI (for a start it excludes many housing costs). Instead they are having to cope with the 4.7% rise in the retail price index (RPI) a measure that was replaced more than a decade ago by the (usually) lower European “harmonised” CPI in order to dampen wage demands.
In his speech on Monday Bank of England Deputy Governor Charles Bean stoutly defended the Monetary Policy Committee’s stance. Although it has taken no steps to combat what it says are temporary upward pressures on inflation Mr Bean maintains that the committee still takes an interest in inflation. He said “We will be watching these indicators [medium-term inflation expectations, inflation swaps], and their impact on wages and prices, like proverbial hawks.” It’s a pity they are only proverbial hawks, not real ones. In common with seven of his MPC colleagues, Mr Bean sees no reason to raise interest rates, even acknowledging that there may be scope for a further round of quantitative easing.
Joe Public is less relaxed about rising prices. A survey last month by YouGov showed no public faith in the 2% target. In October, people were guessing that prices would rise by 3% over the coming year. That outlook rose to 3.3% in November, a two-year high. To put that in context, at the beginning of last year the expectation was 1.1%. In fact CPI went up by 2.9% in the year to December 2009, nearly two percentage points more than people expected. Their most recent assessment shows they have learned at least something from their error.
Even the traditional “higher inflation = stronger pound” relationship may be under threat. It always used to be the case that excess inflation implied higher interest rates and, in consequence, a currency more attractive to investors. A bigger than expected CPI number would have been an almost sure-fire boost for sterling. Nowadays though, there is a sensation that inflation would have to hit double figures before the MPC felt the need to address the matter. Yes, that is surely an exaggeration but if they are comfortable with 3.1%, 3.2% and 3.3% in successive months at what point will their discomfort kick in? There was only the most fleeting upward reaction by the pound after yesterday’s announcement. It opens in London today a cent and a half lower against the dollar than its position at half past nine on Tuesday. It is even fractionally lower against the euro despite Standard & Poor’s threatening to downgrade Belgium’s credit rating because of the country’s political disarray.
As sterling and the euro floundered the US dollar was putting in another strong showing, making gains against everything including the commodity currencies. It was already on the way higher before the US retail sales figures came out. A monthly rise of 0.8% in the headline figure and a 1.2% increase in sales excluding motor cars helped it on its way. It even got a prod when the Federal Open Market Committee announced it was sticking to its plan to roll out another $600 billion of quantitative easing. Six weeks ago, when the plan was first revealed, the market hated it. Printing money was a lousy idea that would debase the currency. Over the intervening six weeks that attitude has changed. Today, investors are inclined to believe that the asset purchase program will help the US economy. As usual, the caveat here is that there is a risk of confusing affection for the dollar with a dislike of its main alternative, the euro. Nevertheless, the dollar’s pushy performance on Wednesday suggests the affair has not yet run its course.
Another busy day for statistics today brings UK and Euroland employment numbers, the CBI’s take on UK retail sales, Canadian manufacturing shipments and a host of US indicators; CPI inflation, the New York Fed’s manufacturing index, TIC capital flows, industrial production, capacity utilisation and the NAHB housing market index. The impact of strong US numbers might be dented by the already optimistic mood of investors but should still be positive. The same is not necessarily true of the UK employment data. Analysts have told the market to expect another small fall in the number of jobless claimants. If claims are higher there could be a fracas.
