UK and Inflation’s Ugly Head

Conclusion: UK Producer Price Index (PPI) numbers were released today for September and show that inflation will remain a headwind for the island economy over the intermediate term TREND.  We sold the British Pound via the etf FXB today as it hit our overbought TRADE target of $1.59 versus the USD.

 

Input prices +9.5% year-over-year and +0.7% month-over-month

Output prices +4.4% year-over-year and +0.3% month-over-month

 

The elevated levels of input and output prices reflect an inflationary environment that the Bank of England will have to address over the intermediate term TREND. With CPI floating above the Bank’s target rate of 3.0% over recent months, commodity inflation should remain a headwind for the consumer over the next months.  In particular, the country’s energy set-up as a slight net importer of oil over recent years with declining production rates over the last 10 years (averaging an annual decline of -6.7% over this period) should help support upward inflation. As the chart below suggests, imported oil prices have increased steadily since their fall in late ’08. And if we’re right on our call on oil, this trend should continue over the intermediate term.  

 

Cameron’s government is now at a crossroads. Having issued austerity measures (job, wage, and benefit cuts and a further squeeze on the consumer with higher VAT), Cameron and Co. must address the broader economy from a fiscal and/or monetary perspective in the next months.

  1. Go the likely route of the US (and potentially the Eurozone) in issuing some form of QE2, ie printing money which should further inflate prices and depreciate the Pound, and/or
  2. Raise the benchmark interest rate to quell inflation, but risk further choking off growth. 

While we’re not going to speculate on the government’s next move right here, we’d be quick to stay away from an investment in the country.

 

In Europe, we’re currently short Italy via the etf EWI. 

 

Matthew Hedrick

Analyst

 

UK and Inflation’s Ugly Head - pel1

 

UK and Inflation’s Ugly Head - pel2


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