Houses And Shares Down, Inflation Up

Shares are sinking, house prices heading south and consumer spending is constipated. Can it get any worse? It can. Inflation is back on the agenda.

Britain's benchmark retail price index rose more than expected last month, and danger signs are flashing that shop prices could soon be heading even higher.

With sub-prime shock waves swamping the stock market, and today's Royal Institute of Chartered Surveyors property warning, you might assume that inflation would be slowing. Particularly as discretionary spending is being squeezed by higher mortgage repayments.

But the Office for National Statistics (ONS) has just confirmed that consumer prices rose by 0.5% in October, dragging the annual rate from September's 1.8% up to 2.1% and topping the Bank of England's (BoE) 2% target for the first time since June. Both figures were higher than analysts' expectations.

For close watchers of food and energy, though, the figures weren't too astounding. Over the last week, several food producers have issued trading statements which I shall be summarising in another piece.

The bottom line is that food prices are increasing at their fastest since 1993, according to the ONS, with a 6% climb in the past year. And petrol prices leaped by 2.4% in October alone, as the soaring cost of oil, up over 15% in sterling terms since August 1st, filtered through to filling station forecourts.

Incidentally, household bills provided the biggest downward impact, with gas and electricity prices falling by an annualised 4%. Though the old style RPI (Retail Price Index), on which many wage deals are based, also rose more than expected, up 4.2% year-on-year.

And it's not that Britain stands alone here. October inflation in the ‘Eurozone' hit a two-year high at 2.6%, again more than most forecasts.

Future Shock

So much for recent history.

Alarming for future inflation prospects was yesterday's news that British manufacturers are upping prices by an annualised 3.8%, the fastest rise in 12 years, as businesses are passing on their extra costs to their customers.

The ONS also revised up the previous month's output price index, suggesting the build-up in cost pressures had been longer than previously thought. And the input measure, a barometer of raw material expenses, rose 8.5% in the twelve months to October, the fastest in more than a year.

The fear now is that over the coming months, UK retailers try to raise their own prices in response.

So the rate setters at the BoE have a big problem.

The economy is losing steam. As credit crunch concerns began to mount, Britain's company directors have become ‘less confident' even faster than in the aftermath of 7/11, according to the Institute of Directors (IOD).

15% of directors surveyed by the latest IOD report said they believed the financial crisis had already hurt their company sales. So with service sector growth slackening, particularly in the City, and the housing market looking set for a sharp slowdown, lower loan costs should be possible.

But the Bank doesn't want to fall into the same hole as the US Federal Reserve, whose benchmark rate cuts have helped turn the greenback into a basket case. Which in turn has produced more American price pressures.

Whilst the ‘factory gate' figures don't automatically mean higher prices in the shops, the trends in oil and food are major worry.

With a whiff of stagflation (economic stagnation + inflation = very nasty!) in the air, the Bank needs to negotiate a very narrow tightrope.

Tomorrow's quarterly Inflation Report from the Monetary Policy Committee should be an interesting read.