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Saturday 17th February 2018
Hi Friend,
Food inflation up 4% ...
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Food inflation hit 4% in January. The price of fish was up by 9%. Fresh fruit cost 7% more, the price of sugar, jam, and chocolate was up by less than 2%. Oh, the delicious irony of the healthy diet with inflation above target.
The overall CPI index was unchanged, up by 3%, the same level as in December. There were some changes, service sector inflation returned to 2.7% from 2.5% prior month. Goods inflation fell from 3.4% to 3.2%.
For the rest of the year, the Bank of England expects inflation to fall back towards the 2.5% level. With earnings expected to rise, the real income squeeze on households should ease back in the second half. It is a fair assumption. Producer prices both input and output eased back in January. The effects of the fall in Sterling and the rise in oil prices continue to ease out of the headline numbers.
Remember when inflation was "always and everywhere a monetary phenomenon". Or when we merely examined "cost push and demand pull equations"? Oh how we laugh now at the simplicity of textbook theory, based on a closed economy with fixed exchange rates. Oil and commodity prices form part of the imported inflation equation, exacerbated or mitigated by the vagaries of the exchange rate. Excess demand is exported into external demand for exports. The "demand pull" is translated into a deteriorating trade deficit as Trump economics is about to demonstrate. The US tax cuts will fuel the twin deficits on borrowing and trade.
No fiscal caution in the US. No "fixing the roof whilst the sun is shining". The Fed is taking away the punch bowl while the music is still playing. The White House is brown bagging, turning up the music, stripping the roof slats for the barbecue. The price will be paid by fiscal headaches, higher inflation and a weaker dollar over the medium term. Bond prices will be placed under further pressure as ten year treasuries test the return to a 3.0% yield as a first step.
So what of the high street? Retail sales disappointed. The worst start to the year since 2013, according to Tom Knowles in The Times today. Remember when retail sales were boosted by the January sales? Then came "Boxing Day Red" as retailers just couldn't wait five days to generate additional cash. Soon followed, the Blue cross series, pulling the action into a pre Christmas kicker as nerves jangled and tills were silent ahead of the holiday rush.
Online sales and the challenge of multi channel retailing continue to disrupt. Over the last two years, the volume action has moved to November. Black Friday and Cyber Monday have pulled the volume into a "quiet month" in the quarter. Was it really so grim in January?
Retail sales volumes were up by 1.6%. Not so bad really! That's the average January volume increase over the last ten years. Sales values increased by 4.4%, ahead of inflation and pay! Retailers like inflation. Lower volumes at higher margins, the antidote to the Amazon model. The Brits were spending on gym wear and equipment in the month. It was ever thus. Food sales were down, yes even sales of chocolate and jam. So much for price elasticity, the headlines do no often tell the full story ...
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She is here but what does she want ...
The Prime Minister was in Germany this week. It didn't go that well. Angela Merkel said she is still curious about UK's goals with regard to the new "relationship". Theresa May said she "would be saying something" in the coming weeks. Reassuring? Not really.
Michel Barnier has said it is time for the UK to make a choice.The Irish Prime Minister argued for clarity and urgency. The Irish still don't know what the British Government wants Brexit to mean. The Irish are not alone.
According to a poll in the Independent on Sunday last week, 74% of Brits polled were unsure about government objectives in the post Brexit deal. The ratio among Cabinet and the Tory back benches must be significantly higher. Whitehall mandarins leading negotiations remain confused with the lack of a clear political directive. It really is getting too late in the day to avoid disruption and a hard landing.
The Prime Minister was in Germany. Boris Johnson was in the UK, delivering a keynote speech. The speech was heavy on metaphor, light on specifics, interspersed with the odd bit of Greek. Too much "telos" without the "logos". The Foreign Secretary Boris Johnson urged people to "unite about what we all believe in". He meant what he believes in, or believes in at the moment, presumably. "An outward looking confident Britain". Yes of course. Who would vote for an "introverted, self-conscious Britain". We want to be outward looking, confident, truly global, as part of the single market and the customs union.
Boris Johnson pointed out, since 2010, exports to the US are up 41 per cent, to China 60 per cent, to Saudi Arabia 41 per cent and to South Korea 100 per cent! Excellent so what's the problem with the customs union. It's a big big hurrah for regulation. Regulation means product standardization and harmonization in international trade. It is not the "Straight jacket by which we are all bound". It is the means by which economies of scale and true productivity gains are achieved across all markets by manufacturers and traders.
Johnson told his fellow Brexiteers they should not "gloat" about the UK's departure from the EU, it was not a "great V-sign from the cliffs of Dover". Yes, Brexiteers should be told, there is nothing to gloat about the UK's departure from the EU. It is a tragedy of Greek proportions. The great V-sign should be waived in the direction of the Foreign Secretary, not to our trade partners across the channel
I am reminded by Gregory Mankiw today, of a line from George Orwell. “We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.” Intelligent? Maybe but over forty years in international business and a PhD in international trade should provide some semblance of authority on the subject.
I divide the arguments about Brexit into four boxes. Political, Social, Economic and Business. You may argue the merits of the political, who governs Britain, sovereignty and the dangers of the European Court of Justice. You may examine the social arguments, largely about immigration and uncontrolled frontiers. But do not try to explain the economic and business arguments for a hard Brexit. For there, all will shortly realise, there are none ... quad erat demonstrandum. In Wigan, that's Latin for I told you so ... the automotive sector will be the first to demonstrate, it will not be alone ...
That's all for this week, have a great week-end,
John
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