UK Inflation Pushing Higher

Today’s UK Producer Price Index report further reminds us why we want to steer clear of this economy in our portfolio. In particular, the Input Price Index jumped 6.9% in December from a year earlier, one indicator to us that further upward consumer inflation (CPI) should be expected over the next months as producers pass along inflated costs to consumers.  With annual CPI at 1.9% and UK GDP still struggling to show growth—quarter-over-quarter it was down 20bps in Q3 ‘09 and annually it fell 5.1%--broader fundamentals continue to look challenged in the UK.

Taking a step back it comes as no great surprise to see the UK report such inflationary figures. Not only has the country imported inflation through the depreciation of the Pound versus the USD and Euro, which bottomed just about one year ago, but the benefit of lower energy prices that we were seeing in July, August and September on an annual compare are now in the rear-view mirror. Input prices for materials and fuels began their rise in October at +0.4%, followed by 4.0% in November.

With the recent UK news flow including calls of no-confidence on PM Brown’s leadership to conflicting discussions on bank bonuses and compensation packages for its all-important but struggling financial industry, we remain vigilant of the fundamental and structural issues ailing the UK.  In Europe, we’re currently invested in Germany on the long side via the etf EWG in our model portfolio.

Matthew Hedrick

Analyst

UK Inflation Pushing Higher - UKPPI