Huw Pill, incoming Chief economist at the Bank of England gave an exclusive interview with the Financial Times this week. "I would not be shocked", he said "If we were to see inflation close to 5% or above in the coming months."
"With an inflation target of 2%, this would be an uncomfortable place for a central bank to be" he added. Governor Andrew Bailey had excited markets earlier this week, suggesting the Bank would "have to act" to curb inflation.
Some analysts think the MPC will act to increase rates by perhaps 15 base points in the November meeting. The Bank had previously said, it expected inflation to hit 4% by the end of the year before easing back into the second half of next year. Pill was of the view the MPC was "finely balanced" over whether to raise interest rates or not.
The latest inflation data would not be much help. The CPI headline rate slowed to 3.1% in September from 3.2% prior month. Goods inflation increased to 3.4%, service sector inflation fell to 2.6%. Basing effects related to the "Eat Out to Help Out" campaign last year, largely explain the drop in service sector prices. Even so without the campaign effect, the headline rate would have been 3.2% to 3.3% at best, hardly a step towards hyperinflation and stagflation.
Producer Prices continued to demonstrate the pressure on manufacturing prices. Output prices increased to 6.7% in September, consistent with a 3.4% increase in consumer goods prices. Input costs increased to 11.4%. Oil, metals and minerals are driving costs higher. This week, Brent Crude closed up at $85.30 dollars a barrel, compared to $41 dollars last year.
Earlier in the year, our models had suggested inflation would peak at around 3% in August before easing back towards the end of the year. The "stickiness of oil prices" suggests this scenario is too benign. Last year Brent Crude Prices increased to $50 dollars by December. We still expect oil prices to was back to $80 dollars in the final quarter. The inflationary impact on producer prices will ease either way. We may have seen the worst of the cost price pressure. We would not expect the headline CPI rate to rise over much from here.
This week Unilever suggested Marmite prices will have to rise by 4%. Product shrink-flation suggests the Cadburys Double Decker may soon be rebranded as a "Minibus".
Pill concluded, "We do not see, given the transitory nature of what we are seeing in our base case, the need to go to a restrictive policy stance."
Inflation is always and everywhere a transitory phenomenon. In the US, the Fed is trying to convince the public, inflation may turn out to be a little stronger for a little longer than forecast. "Transitory" didn't feature at all in the September FOMC minutes ...
Growth Picks Up In October ...
The UK recovery regained momentum in October. The IHS Markit / CIPS flash Composite PMI® data was released this week. Markets just love the headline data.
The October index closed up at 56.8 from 54.9 in September. The service sector index closed up at 58.0 a three month high. The data highlighted a "robust and accelerated" increase in private sector business activity. Survey respondents reported buoyant business and consumer spending as pandemic restrictions are rolled back. New business volumes increased at a strong pace in October. It was the fastest rate of expansion since July.
The manufacturing sector was hit by supply shortages and rising energy and material prices. The headline index fell to 50.6. a nine month low. Still in positive territory but only just. It was the lowest level for eight months. Producers commented on difficulties meeting demand, a result of capacity constraints from lengthy supply lead times and staff shortages.
Producers reported faster rates of new orders with a drop in production linked to capacity restraints. Stocks were depleted. Recovery in the sector hindered. The official output data confirms slowing growth in the sector. We still expect manufacturing growth of around 8% this year, last year's set back was so severe. The tectonic shift in the supply and demand plates nowhere more evident than in manufacturing. We expect GDP growth forecasts for the current year to be revised up to 7.5% to 8% or possible more.
Strong Growth Reflected in Borrowing Figures ...
Strong growth is reflected in the government borrowing figure released this week. Borrowing in the first six months of the year was £108 billion compared to £209 billion over the same period last year. For the year as a whole borrowing could fall to £150 billion. This compares to the OBR forecast of £234 billion at the start of the year, postulated on the basis of 4% growth in the economy.
Interesting to see what lies in the Budget Red Box next week. No real need for tax rises at this stage in recovery. No time to hike corporation tax, no need for a rise in NI employment tax. Strong revenues are flowing into the Treasury coffers. The deficit will fall to pre Covid levels within two years ... no need for strong action at the Despatch Box ... unless the Treasury thinks it has a point to prove ...
Tectonic Plates Have Shifted ...
Two early morning sessions this week. It was our Quarterly economics update with Protiviti and Robert Half on Thursday. On Friday, we were presenting at the ICAEW Virtual Economic Summit.
The challenge, how best to explain the vagaries of recovery with concerns about supply shortages, recruitment difficulties and energy cost spikes. Questions about possible stagflation were in the "virtual" room. Concerns were expressed about growth and recovery prospects.
The situation was complicated by the jobs survey data, this week. Unemployment fell to 1.5 million. Vacancies increased to 1.1 million. The unemployment rate fell to 4.5%. The earnings rate slowed to 7.2%. The furlough scheme closed at the end of September. The expectation is most of the estimated one million on furlough, will be absorbed back into work or into the workforce more generally. The IFS worst case scenario is that approximately 300,000 may form part of a frictional adjustment in unemployment to be absorbed over the next six months.
On Thursday, the latest estimates of growth were released for the UK economy. In the second quarter, growth is estimated to have risen by over 24%. It is now clear growth in the third quarter will be 7% year on year. Assuming growth slows to around 5% in the final quarter, the year on year performance will be over 8%. Accommodation and Food expanded over 25% year on year in Q3. Transport and storage is growing at over 10%. Construction output will average over 10% in the period.
The trend rate of growth for the UK economy we model at 2%. A fourfold increase in the growth rate, with a tight labour market, supported by the furlough scheme, is leading to labour and supply constraints not just in the UK but around the world. There are four critical phenomenon ...
1 The Covid pandemic was a seismic event creating a shock to output in the UK and world economy in 2020.
2 The strong recovery has revealed a tectonic shift in supply and demand plates in the world in 2021. Supply streams are struggling to get back on line and into line with the dramatic demand surge.
3 Energy costs and commodity costs are spiking as demand returns to a world economy growing at 6% p.a.
4 Lock down and WFH has generated for many a fundamental reassessment of work life balance. Quality of life issues abound. 4.5 million quit their jobs in the USA in August. Recruitment difficulties are endemic as jobs growth pressures increase.
So what of inflation? CPI inflation is expected to peak at around 4% before easing back from the second quarter next year. Inflation is always and everywhere a transitory phenomenon. No real expectation of an early rate rise. The shift in tectonic plates will continue to "shake" the world economy. No need to hide under the furniture, a chance to recognise strong growth and the challenges and opportunities that presents ...
All At Sea ...
Much talk of supply side constraints at the ICAEW event last week. No surprise really. World trade increased by 22% in the second quarter. Growth is expected to be 15% for the year as a whole.
Trade fell by 14% in Q2 last year. Container capacity was cut by 10% as a result. Shipping pressures are evident. Supply networks are all at sea.
Freight costs have surged. China to the West coast peaked at over $20,000 dollars in September. Prices have eased back to $15,000 dollars since then but still well above the $5,000 average at the start of the year.
Lead times are increasing. The gap between order and delivery for "chips with everything" increased to a record 22 weeks in September from 12 weeks in January. Lead times for container shipments have increased from 60 days to 70 days.
Congestion at port is increasing. In Los Angeles, 29 ships are in port with 38 waiting to dock. In HK Shenzen, 39 are in port with 67 out at sea. In Shanghai, 86 are in port with 61 at anchor. This week Maersk redirected container ships away for Folkestone to avoid excessive delays ...
Once in port, containers are piling up on the docks. A shortage of HGV drivers is creating problems to clear the decks. In the US President Biden is urging the ports to work 24/7 to clear the backlog. In the U.K. the government is increasing visa allocations for elves and sleigh drivers to ensure Christmas is delivered on time.
Strange to think I had a couple of weeks off in August. It all seemed so predictable and straightforward. Not a Black Swan in Sight ... A reminder, when all the plates are spinning nicely, it's either the end of the act or an illusion ...
But Not For Long ...
The U.S. is pushing OPEC to boost oil production. China is ordering miners to ramp up coal output. Russia is pressing Europe to commission Nord Stream 2. The LNG tankers are turning East. China seeks to boost stocks before the hard winter ahead. Saving the planet will just have to wait but hopefully not for too long.
The fuel crisis is pushing prices higher. Brent Crude closed at $82.54 up from $78.77 last week. Gas prices hit $6.50 dollars before moving off peak. Prices closed 12% down from the mid week high. The cost of extraction is no mean variable. Hikes and Spikes the real reason for the price performance. The price pattern is beginning to mirror the problems in the lumber region, earlier this year.
Lumber now trades back towards $500 from the $1,500 dollar mark in April this year. We would expect gas prices to ease back, despite stock building in major markets. Prices averaged just $3.00 per unit in May. The markets explain why short term demand exceeds supply but not the full extent of the price ramp.
This week, gas dependent producers including paper, steel and gas met with Business Secretary Kwasi Kwarteng pleading for help with cost prices. They failed to find any solutions in the Kwarteng closet. Production cuts or even closures are on the cards unless the government introduces price intervention to alleviate the cost burden.
"A problem for the Treasury and not the Business Department" explained the Secretary of State, never one to dodge a difficult issue. The recent success with the boost to CO2 emissions was obviously enough in a busy year.
Rishi Sunak at Conference this week explained " The future is here, even if you can't see it yet." No thought of tomorrow? Not really! "We are going to make the UK the most exciting place on the planet." No explanation forthcoming from the Prime Minister's speech, as to how we are to achieve this. The petrol crisis may be easing but dead pigs may soon lie at the doors of Downing Street.
The Russians wants to boost gas delivery to Europe with the opening of the Nord Stream 2 pipeline. Gazprom is seeking a fixed term price contract to avoid spot price exposure for buyer and seller. The EU should accept the deal and not succumb to U.S. pressure to accept North American LNG as an alternative.
"The raucous squawkus from the Anti Aukus caucus" should be a rallying call for the reassessment of U.S. foreign policy and trade policy. Uncle Sam is enthralled by the Eastern promise not the ways of the West.
In the UK, the government should offer a short term price cap for business with a commitment to build gas stock capacity to the European average. "Build back better" should include gas fittings in addition to Johnson's "fibre optic vermicelli" set to assist with the leveling up agenda.
If OPEC open the oil valves and Biden gives the nod to US oil rigs, oil prices could move back into line and ensure the talk of $100 dollar oil is removed from the agenda once and for all ... the price crisis could be over by Christmas ... households will have enough gas to defrost the foreign frozen turkeys imported from Poland and France ...
Inflation ... Transitory or Tipping Point ...
"High inflation is rising faster than expected and will last longer than anticipated". The new Chief Economist Huw Pill was speaking before the Treasury select committee this week. The rise in prices would prove to be temporary but the "magnitude and duration of the transient inflation spike is proving greater than expected".
The Bank now believes inflation CPI basis will hit 4% before easing back towards the 2% target by the end of next year. The emphasis remains on "transitory rather than a tipping point".
Prices pushed higher by energy, commodity and metal prices should unwind as supply begins to meet the demand surge from a world responding to the covid output shock. This month, shipping costs are falling back as the container capacity moves back into line.
We will update our price forecasts once the latest date for September is released on the 20th this month. The resilience of the oil price suggests the Bank expectations could understate the short term peak ... some expect prices to rise over 5% into the New Year but then some expect a rate rise before Christmas.
Pull the other one, that's if you can find a Cracker for Christmas ...
Here's What It Means ...
Last week we explained how the surge in world trade is causing problems at the docks. This week we explain how the surge in UK growth is much faster than expected and much faster than currently forecast.
Growth in the second quarter was up by 24% compared to prior year. For the year as a whole we expect growth of between 7.5% and 8.5%. Growth could well be over 15% over the two year period. No wonder the economy is showing signs of overheating. We map the trend rate of growth over the ten years prior to the shut down at 2% per annum.
The rate of change is slowing as the economy returns to the trend rate of output. Fears for the current year are over blown. If there was no growth at all from Q2 levels, the comparisons with prior year would still show growth of 7.2% for the year as a whole. Last year was so bad after all.
Manufacturing was up by 28% in the second quarter. Construction was up by 57%. Service sector growth was up by 23%. No wonder, there are over one million vacancies in the economy and wages are rising.
Household spending was up by 20% in the second quarter. Business investment was up by 13%. We expect consumer spending to increase by over 8% this year. With a strong surge in leisure, clothing and tourism sales, forcing the pace.
The furlough scheme ended in September. Most furloughed are expected to return to work. Some "frictional" unemployment may arise before the u rate returns to current levels over the next six months.
Strong domestic demand led to a surge in imports up 20%. No evidence of a strong performance from "Truly Global Britain", exports were up by just 3.5%.
Strong growth continues into the third quarter. The so called GDP "slow down" in July meant that output was up 7.5% year on year. The latest IHS / Market CIPS UK Manufacturing PMI headlined "Manufacturing upturn slows further as supply chain and labour shortages stymie growth". Was it really that bad? The headline index was 57.1 in September with an average of 60.0 in the quarter as a whole. That is actually higher than the second quarter!.
Sterling was hit this week, closing at $1.3562 against the dollar. The Pound was out of favour as traders fear slowing growth will inhibit the capacity of the Bank to raise rates before the end of the year. As if that was on the cards anyway.
The government is acting to deal with the emerging crises. Subsidies to boost CO2 emissions, the army to deliver petrol and pick the daffodils. Visas for EU drivers and chicken pluckers. Imports of turkeys from Poland and France to save Britain's Christmas Dinner. Older drivers to be captured from care homes to return to the cab.
Driving tests to eased and fast tracked. No need to test for reversing skills or the ability to hook up the trailer in the new era. Extended hours for existing drivers, five star hotels for those away overnight. What next? Lorry drivers allowed to use the hard shoulder to help push the deliveries through.
Growth is much faster than expected. It will continue into next year. Shortages and supply constraints will be measured as demand deferred into the later period. Strong growth is producing signs of overheating .. Inflation pushed higher by rising energy and commodity costs ...
Signs of Overheating ...
But commodity prices are easing. Oil Brent crude basis closed at $78.77 this week, the move over $80 dollars proved too much. We expect the trade to continue between $75 and $80 dollars in the current quarter. This compares to an average $42 dollars in the final quarter last year. The inflationary impact will fade by Spring next year.
Gas prices moved off peak, closing at $5.576 from $6.000. Copper closed at $4.20 from $4.70. Aluminum leading the chase higher, was off the top closing at $2,852 from $2,937 in September.
Remember the stress in the lumber region? Prices closed at $620 at the end of the week, compared to $1,670 in July. Freight costs are moving lower, the cost of shipping to the west coast was off 5% from peak in September.
The best cure for rising prices is rising prices. CPI inflation is projected to rise temporarily in the near term, to 4% in Q4. Thereafter, inflation is expected ease back towards target by the end of next year.
Signs of overheating are evident as the economy returns to trend. Rising cost prices. Delivery shortages. Higher wage levels and a high level of vacancies persist. The surge in world trade is causing problems at the docks. Covid disruption in Vietnam still plays havoc with the global supply chain.
Growth in the UK is much faster than expected and currently forecast. Signs of overheating are evident. The underlying trend is that of strong growth, set to continue. It is important to distill the signals from the noise. At The Saturday Economist we always keep you in the picture ... Our September forecast available to Premium Subscribers, members of The Saturday Economist Club ...
That's all for this week. Have a great weekend and a great week ahead,
Creating Problems at The Docks ...
In Southern California, off the twin ports of Los Angeles and Long Beach, 62 container ships lie at anchor, awaiting an unloading berth. The floating queue, a phenomenon unknown before the pandemic, has doubled in size since August. The precious cargo includes toys, electronics, furniture and many other goods awaited in distribution depots and in store.
A further 29 ships are adrift twenty miles offshore. They are so far from the coast, their anchors cannot reach the ocean floor.
Onland, docks and railroad terminals are jammed with shipping containers amid an epic buying spree by companies, racing to keep up with domestic demand. Trucking companies and warehouses can't find enough workers to keep freight moving. Americans are waiting for auto parts, Lands End clothing, cat food and Peleton exercise gear, amid many other products apparently.
The Biden administration is struggling to ease congestion in the nation's freight system. The smooth economic recovery is being disturbed by product shortages and rising prices. This week, the Federal reserve lowered their forecasts for U.S. growth this year to 6% from 7% as a result.
Forecasts for inflation PCE basis have been increased to 4.2% from 3.4%. The unemployment rate is expected to rise to 4.8% before easing back next year. The good news, forecasts for growth, jobs and inflation are all heading in the right direction in 2022.
Growth is expected to be just under 4% next year, slowing to 2.5% in 2023. Employment will increase, inflation will return towards the 2% target. Jerome Powell and the FOMC hinted tapering could begin before Christmas. Interest rates could begin to rise next year. The central project for the Fed Funds rate suggests rates could increase to 0.3% in 2022 rising to 1.0% in 2023 and almost 2% in the following year.
It will turn out NICE again. Non Inflationary Controlled expansion, not the nasty Stagflation the pessimists are projecting. US markets closed up. The Dollar moved higher against Sterling and the Euro. Ten year bond yields moved higher closing at 1.45 from 1.37. It's business as usual for now.
A rising tide lifts all boats. World trade increased by 10% in July. Exports from China to the rest of the world increased by 20% in the second quarter. Much of this was heading for the West Coast of America, as the shipping lanes queues and dollar freight rates attest. World trade is bouncing back ... creating problems at the docks ...
Crisis at the Pumps ...
Last week we were worried about the lack of CO2 emissions. This week it was all about gas prices and problems at the pumps. The spike in gas prices is forcing smaller suppliers out of business.
The gas crisis was explained. A dependency on foreign imports. Problems with the Russians, poor connections with the French. A lack of storage capacity in the UK. Winters too cold, summers too hot and a lack of wind to blow the turbines, when the kettles are on. Oh yes and the price cap! disturbing the natural rhythms of the free market.
Crisis at the pumps. The lack of HGV drivers means petrol stations are closing for lack of logistical supply. Don't panic. There's lots of product. The government is ready to relax the visa scheme to tackle the truck driver shortage. 10,000 foreign workers will be allowed into the UK to meet essential food and fuel requirements. The army is to assist with training and testing of new entrants into the delivery network.
"Johnny Foreigner set to save Christmas" the headline on the side of the double decker bus. Soon we may be asked to "Toot for the Lorry Drivers", as they ensure the holidays are coming. The turkeys will be pleased.
The Bank of England moved this week to hold rates and continue with the asset purchase program. The Committee voted by a majority of 7-2 for the Bank of England to continue with the program of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of government bond purchases at £875 billion and the total target stock of asset purchases at £895 billion. With borrowing of around £170 billion this year, the Bank may yet have to do more and fill the Chancellor's £ trillion pound bank note.
CPI inflation is projected to rise temporarily in the near term, to 4% in 2021 Q4, owing largely, it is said, to developments in energy and goods prices. Conditioned on the market path for interest rates, CPI inflation is expected to fall back to close to the 2% target in the medium term but then it always does.
Forecasts for growth this year may be eased back slightly reflecting concerns about supply side constraints. The Bank had forecast growth of 7.25% this year. Further data is needed before any significant adjustment need be made ...
The Bank expects inflation to rise to 4% ...
Inflation CPI basis hit 3.2% in August. The move was pretty much expected. The Bank expects inflation to rise to around 4% by the end of the year. For the moment, that looks like a pretty fair bet. The big question remains, just what exactly happens after that!
Strange things in the mix. Goods inflation increased to 3.3% in the month. Service sector inflation increased to 3.0%. Second hand car prices increased by over 18%. Air passenger transport costs increased by 14%. Motorbike prices were up by 12%. The cost of fuel was up by 18%.
Want to go out for a meal? In the restaurant you will be paying at least 8% more. Want to stop over? Accommodation price rises were 12% higher in August. OK, you may have to make your own bed and breakfast but hey that's life post pandemic, as the world tries to return to normality.
Nothing in the data suggests a rise in food prices as yet. DIY, household appliances and furniture prices averaged an 8% increase. Everything to suggest inflation is always and everywhere a transitory phenomenon. We had expected inflation to peak in August. The continued highs in the oil market suggest the Bank scenario is more likely now ...
Manufacturing Costs Up 11% ...
Manufacturing costs increased by 11% in the year to August. The latest data suggests the May peak was illusory. Costs for manufacturers continue to rise, up from 10.4% in July.
Crude oil prices were up by 50%. Metal prices up by 20%. Chemical costs were up by 12%. Oil closed up at $74.82 at the end of the week. The inflationary impact year on year, will continue into the first quarter of 2022.
Iron ore prices dropped by 20% last week. Copper prices are down by by 12% from the peak in May. Aluminum prices on the other hand, are pushing new highs. Prices are up by 60% year on year. The coup in Guinea, one of the world's top bauxite producers, spooked an already jittery market.
No let up in shipping costs either. A container from Asia to the West Coast USA is priced out at $20,000 up from $2,500 at the start of the year. Energy costs were threatened by a spike in gas prices. Prices have doubled over twelve months. Record gas prices in Europe have forced shut downs in fertilizer plants, indirectly creating a carbon dioxide shortage with implications for food and farming production.
Leaders of the top U.S. industrial companies gathered virtually this week, at the annual Morgan Stanley Laguna conference. Much of the discussion centered on the rising costs of raw materials, labor shortages and logistics. Businesses are faced with the increasingly difficult challenge of getting enough supply to keep up with demand ... world trade was up 22% in the second quarter as strong growth returns ...
Vacancies Rise To Over One Million ...
In the UK the number of vacancies in the economy increased to over one million in August. Accommodation, food featured along with vacancies in retail, health and social care.
The number of people unemployed fell slightly to 1.550 million. The u-rate eased to 4.6%. The number of people on furlough fell to 1.6 million at the end of July.
One million vacancies, 1.6 million on furlough, 1.6 million unemployed. The end of the furlough scheme at the end of September will make for an interesting scenario towards the end of the year. The hope is a significant surge in job losses can be avoided. Market forecasts are for the unemployment rate to increase to 5.3% in the final quarter before easing back towards current levels by the end of next year ...
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The UK recovery appeared to stall in July. The ONS monthly estimate of GDP growth for July was up by just 0.1% compared to prior month.
Supply chain problems persist, worker shortages continue. No growth in the service sector; no growth in manufacturing; output down in construction apparently.
Not a great time to put up taxes. Boris Johnson signalled a ten year plan to stay in Number Ten. Abolishing the triple lock and a National Insurance surcharge hardly a measure of intent.
The jobs market is in a precarious position. 1.6 million unemployed, 1.6 million on furlough and 1 million vacancies in the economy. We await with caution, to see how the furlough scheme will unwind. For the moment, analysts expect the increase in unemployment to be around 250,000 by the end of the year. The unemployment rate will increase to 5.4%. The changes in NI rates will not ease the transition. The planned cuts to universal credit will not ease the pain for many.
Our chart of the week updates the analysis of vacancies and furlough numbers by sector. Overall the ratio of furlough to vacancies is 1.6. Accommodation, food, construction and transportation appear to the focus of higher furlough rates. It is difficult to understand why these areas are most cited in terms of recruitment difficulty, when so many remain in stasis. The problems in health and social care are most apparent, with 64,000 on furlough and 161,000 vacancies in the economy at the end of July.
So what Are the Prospects For Growth This Year ...
Despite the disappointment of the July data, the economy remains on track for growth of around 7% this year. The July numbers may have been up by just 0.1% compared to prior month, Compared to prior year, growth was up by 7.5% following a 22% surge in the second quarter. Service sector growth was up by 8%. Manufacturing up by 6% and construction up by almost 9%. Accommodation and food increased by over 50%.
Growth is expected to pick up in August, with continued expansion in tourism and hospitality. The steady return of staff to the office, particularly in London, should boost transport and the service sector. NIESR expects growth of around 7.5% year on year in the third quarter. A steady recovery to the end of the year, will be supported by a further catch up in hospitality and transport.
The government is acting to ease the crisis in Road Haulage. Would be stay-cationers in caravans will no longer have to pass a test to make the trip. The much needed testing resource could lead to an additional 40,000 drivers getting an HGV licence in time for Christmas.
There may be no chicken in Nandos but there is still every chance of a vote for turkey at Christmas ...
Inflation is set to surge this Autumn. Business leaders are warning of a perfect storm. Problems created by Brexit, labour shortages, the pandemic and the pace of global recovery are forcing prices higher.
The cost of tomatoes has doubled in the past year, vegetable oil is at the highest price in over thirty years. It hasn't been this high since it was stocked in the local chemist shop.
Energy bills are rising. Oil continues to trade above $70 dollars. Natural gas prices are soaring. Prices have risen to over 130 pence per therm compared to 10 pence last year. That's bad news for manufacturers around the world, from China makers in China, to patisserie peddlers in Paris, apparently.
Sugar and Steel manufacturing is affected by increased costs. Then of course there is the challenge of shipping. That's assuming you can book a container to make the delivery. The Baltic Dry Index hit a ten year high last month.
Shipping container rates from China to the US and Europe have surged in recent weeks. In early August, shipping rates for the China-US East coast route topped $20,000 compared to just $5,000 dollars at the end of last year, according to Freightos, the online market place for international shipping.
Want to ship to Europe from Asia? Prices have increased from $2,500 dollars per container to almost $15,000 in the course of the year. Then once in the UK, you will need a driver. With a shortfall of almost 100,000 drivers according to the RHA, pay rates are escalating to £50,000 per annum in some cases.
Copper prices may have eased back from record highs but aluminium and nickel have take up the price hike challenge. Aluminium prices increased to $1,600 dollars per pound this week, compared to just $800 dollars at the start of the year. Cans and chips will cost more. TSMC announced a 20% hike in semi conductor prices as car production stalls.
In the UK, average earnings increased by almost 9% in June. Private sector earnings increased by over 10%. Construction earnings increased by 14%.
So is inflation always and everywhere a transitory phenomenon? The Bank of England expects inflation to peak at 4% later this year, before returning to target towards the end of next year, as the disruption impacts unwind.
Retailers are warning prices are set to rise and soon ... but some manufacturers are warning of a reluctance to pass on cost increases at the risk of losing sales.
Next week, we will examine in detail the prospects for inflation as we update our inflation models and chart book. The implications are not quite as bad as this week's update may suggest ...
In the U.S. just 235,000 jobs were added in August. Expectations of a 750,000 job surge were left stranded. The Federal Reserve and the White House had hoped for strong job gains across the board. Over one million jobs had been added in July.
Professional services were amongst the beneficiaries as hiring stalled in leisure and hospitality sectors. Retailers and restaurants shed jobs. Overall the unemployment rate fell to 5.2%.
Analysts now suggest the US central bank could defer any suggestion of tapering before the end of the year. What a surprise! The strong jobs market and rising inflation had led some, but not all, to expect a reduction in the asset purchase program before the end of the year.
Borrowing is expected to hit $3.7 trillion dollars this year. The Fed will have to maintain the role of "buyer of last resort" over the short term. The $40 billion monthly mortgage backed security plan may be on the hit list to satisfy critics of the ever expanding central bank balance sheet.
Bond markets were unexcited by the latest jobs data. Ten year U.S. bond yields closed up just one basis point to 1.33. Sterling moved higher to close at $1.3864. Markets were mixed. Bill Gross the ex Pimco bond czar suggested "Government Bonds Are Garbage". "Buying U.S. government bonds is all but certain to be a losing bet" he said.
Cash is trash, bonds are garbage, and the Warren Buffet Valuation index moved to a record high reflecting a 90% over valuation compared to historical average. What next for the model portfolio ... Red Dots Are Rising
No Chicken in Nando's, No Chips at Nissan, No shakes at MacDonald's. Empty shelves are increasing. The head of the Co-Op said food shortages were the worst he has ever known.
Evidently not a war baby, CEO Steve Murrells announced the group was reducing some ranges. The ability to get food into stores was hit by post Brexit migration rules and Covid challenges.
A lack of fruit pickers, food processors and lorry drivers to blame for part of the crisis, businesses are pleading for a relaxation of rules on visas and an acceleration of test and training for new drivers to ease supply problems.
This week, once again, the car industry reported production difficulties. Output fell by 37% last month. It was the worst July performance since 1956. Manufacturers "grappled" with the global shortage of semi conductors. TSMC, the Taiwan Semi Conductor Manufacturer moved to ease the supply crisis by hiking prices 20%.
Will empty shelves damage growth?
Not according to the latest "Forecasts for the UK Economy" published by HM Treasury. The average forecast for GDP growth in 2021 remains at 6.9%. The more expansive forecasts have been tailed back.
JP Morgan is now forecasting growth of 7.1%. Capital Economics expects growth of 6.7%. Goldman Sachs is even more nervous about prospects for the UK. The American Bank is forecasting growth of 7.1%. Our Saturday Economist central forecast, we may lower perhaps to 7.0% on the next data release in September. We still expect growth of over 5.0% in 2022, slowing to perhaps 3.5% in the following year, thereafter reverting to trend growth of around 2% in the years to follow.
Over the next five years, the economy will grow by over 20% in real terms and by over 30% in nominal terms. The additional revenues to the Treasury will be almost £250 billion in the period. The latest borrowing figures suggest the total borrowing this year could fall below £175 billion. In March the Office For Budget Responsibility was expecting borrowing to hit £234 billion.
Inflation fears are increasing. CPI inflation is expected to average over 3% in the final quarter compared to just over 2.5% expected last month. The July 2% CPI level reported is dismissed as an anomaly.
Our Labour Market Chart Book has an update on the latest data. Analysis of wage trends suggests rates of increases will fall towards 3% by the end of the year. We await with interest the end of the furlough scheme. I.6 million unemployed, 1.9 million on furlough and 1 million vacancies in the economy will make for an interesting unwind towards the end of the year …
Taper Tantrum ...
In the U.S. the Office of Management and Budget expects consumer prices to rise by 4.8% in the fourth quarter. This is up sharply from the 2% rise the Biden administration had forecast in May.
Inflation is always and everywhere a transitory phenomenon. Price pressures will ease next year. The consumer price index is expected to increase by 2.5% in the fourth quarter of 2022.
Markets awaited with interest the update from Fed Chair Jerome Powell this week, at the Jackson Hole virtual symposium. The central banker hinted the Fed could start scaling back stimulus this year. The inflation surge is expected to be temporary. There was no prospect of a rate rise anytime soon but some tapering of asset purchases could begin before the end of the year.
"At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July".
No taper tantrum in the markets. The Dow, S&P and Nasdaq closed up in the week. The S&P and Nasdaq closed at record highs. The Dollar moved lower against Sterling and the Euro. Ten year bond yields moved up six basis points closing at 1.32.
The Fed has made it clear rates remain on hold. The asset purchase tapering may be confined to Mortgage backed securities in the short term. The Central Bank will have to fulfill the role of "Buyer of Last Resort" of government bonds until the level of government borrowing falls within the capacity of the private sector. That may not be for some time yet.
The Warren Buffet Valuation index moved to a record high reflecting a near 90% over valuation compared to historical average. Don't Miss Our Special Update "Red Dots In The Sand: When Will Markets Collapse."
That's all for this week. It's good to be back. We have been working on our series on Digital Accommodation during the break with special updates for Premium Club Subscribers. We will be back with more next week. Want to be sure? Join the Club, become a Premium Subscriber, don't miss out …
The Saturday Economist
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