A report from the UK Office for National Statistics today showed the country’s Consumer Price Index for October rose 1.5% year-over-year, from 1.1% in the previous month. This seemingly large jump is better understood within the context of the precipitous fall in energy prices last Fall from manic highs in the summer of 2008 (see chart).
In fact, prices from fuels and lubricants in the UK fell by 0.7% between September and October this year versus a fall of 6.1% a year ago, which was a major contributor to October’s inflationary print. Month-over-month CPI rose 0.2%.
In 2009 we’ve stayed away from (or shorted) countries with financial leverage. We continue to see headwinds in the UK into 2010 including rising unemployment, ballooning government debt, and a weak Pound for the import-heavy economy (for more see our post “Pounded Pound Breeds Inflation” on 11/6). The government’s recent decision to bailout RBS and Lloyds for a second time to the tune of 31.3 Billion Pounds and the extension of the BOE’s bond purchasing program by 25 Billion Pounds after printing a contracting Q3 GDP report (-0.4% Q/Q) add support to our bearish conviction.
In our virtual portfolio we remain short the UK via the etf EWU and short the Pound via FXB.
Matthew Hedrick
Analyst
