The Prime Minister in Salzburg ...Looking for a way out ...

Ambushed in Salzburg, the Prime Minister had no idea the Chequers plan was to be rejected out of hand. Twenty minutes before facing the cameras to make a speech about a "constructive" meeting with the EU President, Donald Tusk read out a prepared statement, "The suggested framework for economic co-operation will not work" he said bluntly. The Chequers plan rejected by "Brexiteers" and unloved by "Remainers" had met an inevitable fate.

A diplomatic disaster had taken place. Amendments were hastily made to her speech. Visible angered and shaken, the PM described the meeting as frank. "Blindsided and humiliated", the verdict of the Times today. Tusk compounded the problem with an Instagram post, a photo of the PM at a cake stand, with a caption saying "no cherries". A crude reference to the criticism of "Chequers" as "Cherry Picking" the best bits from any single market deal.

The UK proposal was never going to be accepted by the EU, any more than it could be accepted by the Tory Party. Ollie Robbins, the Chief Brexit negotiator, compounded the problem, suggesting further concessions from Britain were not evident.  "I said these negotiations would be tough" said the PM "they were always bound to be toughest in the final straight".

"While both sides want a deal" she continued", "we have to face up to the fact that there are two big issues where we remain a long way apart". The Prime Minister is an optimist. "Only two issues to resolve, a long way apart, in the final straight". That's an underestimate of a contradiction in terms, one of many in the leave scenario. We are leaving the club whose rules we are trying to change as a condition of absence.

"In the meantime, we must continue the work of preparing for a no deal" threatened the Prime Minister. If only we had any idea just what a no deal would entail ...

Inflation increased in August ... 
Inflation jumped in August, CPI basis to 2.7%. Goods inflation increased to 2.8%. Service sector inflation increased to 2.5%. Always amusing to read some of the headlines on the day with a snap rationale of economics news. "Theatre prices push inflation higher" a particular favourite. The underlying reason is the rapid change in oil prices. Oil prices Brent Crude hover below $80 dollars now compared to $50 dollars in August last year.

Transport costs made the largest upward contribution to inflation with prices rising by 6.0% in the year to date. The largest contribution within the transport group came from motor fuels.

Manufacturing prices, better explain the story. Input costs increased by just over 8% in the month, driven higher by a 40% increase in crude oil prices. The rate of input inflation was actually lower than prior month. In July the price hike was nearer 10%. That's why, we expect the rate of consumer price inflation to moderate towards the end of year as oil prices work there way out of the index. CPI inflation will remain some way off the 2% target. No Christmas present for the Governor in the top line figures

Goods new for retail. Volumes increased by over 3% in August. Spending in value terms increased by 5.6%. Don't write the consumer off just yet. The hot weather contributed to the growth in activity. On line sales increased by 14%, now accounting for 18% of all activity. If current trends are maintained, internet penetration will increase to 20% by the end of next year. That's one in five transactions out of the high street.

Within five years, on line sales could account for 25%, that's one in four retail transactions. Food penetration is currently just 5%. The challenge - to get the online food model right. Amazon is leading the way with the acquisition of Whole Foods and the development of 3000 cash less stores. It's all about "managed footprint and  last mile logic" ...
Trade talks are off ...
The Chinese are pulling out of trade talks ahead of the mid term elections. Confronted with further tariffs on $200 billion of goods, there would seem to be little point in talks with Washington. China will not return to the table any time soon

Trump continues his political incantations in the search for votes. Japan is next in the firing line. The biggest deficit generator after China and Mexico, Tokyo will be pulled in for talks about trade. A 25% tariff on cars would be a real threat to local output. "Trade is bad" "protectionism is good" the White House mantra.

But is it? Vivian Sayward, a manufacturer of athletic clothing in San Diego, is not quite so sure. Prices are expected to rise on a number of materials, including a polyester-Spandex-blend fabric heavily used by the firm. “This tariff was supposed to help American manufacturers, but truthfully, we may have to start manufacturing outside the U.S.," said Sayward, who founded Vivacity Sportswear six years ago. “I’m not quite sure, to be honest, how my business can survive long-term."

Rising prices will be the result of higher tariffs. Higher prices will mean lost out put for many manufacturers and pain in the pocket for households and consumers. Apple was able to secure tariff exemptions for key products but Apple is an exception. The Trump proposal to assemble components in the USA subject to import tariffs from "Another Place" is illogical. The threat to world trade is significant as the IMF and the OECD have pointed out.

Let's get the mid terms out of the way, the GOP may lose control of the House and the Senate, then we must hope, some semblance of sanity may return to talks about trade ...

That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week,

John