Tuesday, 10 June 2008

Producer prices take off

Inflation is taking off. Producer price inflation in May hit 9 percent. Furthermore, with oil hitting $139 a barrel, there are no indications of an improvement in the near future.

Estate agents and buy to let speculators might be hoping for a rate cut, but a rate rise is now lookiing more likely. Interest rates across the OECD are too low, and central bankers are waking up to that sorry reality. Both the ECB and the Fed have begun to hint that the next rate move will be up. If the two big girls move, the Bank of England will have to follow.


Anonymous said...


Note there is no way for the producers to pass on this price increase net. With consumer credit contracting and wages level (and about to decline in aggregate due to recession / unemployment) then the aggregate amount of purchasing power out there is contracting.

So that results in a zero-sum game. Every penny added onto oil and food is a penny subtracted from apparel, entertainment etc.

The only way the non-essentials can increase prices is if consumers overly contract out of oil and food by reducing journeys, economising and so on. Personally, I can't see it. I think it's the movie tickets and designer jeans that will suffer.


Edward Harrison said...

So Alice,

What's your call? Is the Fed bluffing or for real? I believe Trichet when he says he's hawkish. Bernanke is full of it. And the BoE, where are they going next?


ps. Here's Caroline Baum's take on it

Carloine Baum

Alice Cook said...

Edward, when the Fed had their panic attack and began to cut, they merely replaced one problem with another.

It is worth remembering that the reason that the US housing market began to crash was due to inflationary concerns. The fed were hiking before August 07, and would have kept rates high were it not for the credit crunch.

When the banks started to wobble, the Fed cut rates, but inflation didn't go away. Instead, the rate cuts fueled a commodity boom that must have shocked the FOMC. Now they have an commodity bubble that is out of control and a 2 percent fed rate isn't going to calm things down.

The Fed will have to start to raise rates. The sooner the better.

As for the ECB, Trichet has already signalled a rate increase for July.

I can't imagine that the BoE could stand by and watch the the Fed and the ECB raising rates. Sterling would sink and since most of the inflationary pressure is coming through import prices, any sterling weakness right now would be most unwelcome.

At least that is what I think


aSteve said...

I agree with you, Alice... though I think the Euro exchange rate matters far more to Britain... since the vast majority of British trade is with the continent rather than being transatlantic these days.

I can imagine the MPC accepting that it has to hold while the ECB raise - but these raises seldom come singly... and once orthodox policy is to raise rates... that's what we will likely see. I'm encouraged in this regard by the fuel protests... and by the fact that government instruction to the BoE was re-iterated as being to target inflation.

Not long to go now before the next CPI figures are out - and, with them, a good chance of a public letter from Mervyn to Gordon. That should be an interesting read.

P.S. Have you see the builders' share prices today? :)

Alice Cook said...

Asteve, yes I have seen them. Just posted Barratts.

aSteve said...

I must learn to read before I type. ;)

It would be great to know how many homes Barratt owns; what is their outstanding debt - and who finances it.

How would a Barratt bankruptcy affect the market?

Cato said...

So central banks have finally woken up and found inflation. Bit late, really.