WHO says that markets are rational? Just two months ago, when shares fell like burnt moths, fund managers were spooked by inflation. Those fears were most vocal on Wall Street but evident in Britain, too. In Merrill Lynch’s broadly based survey, a net two thirds of UK fund managers saw inflation rising over the next 12 months but a net quarter reckoned that the economy would strengthen over that time.
By July, just ahead of the latest trouble, fears of higher UK inflation had subsided, even though the Bank of England had kept interest rates unchanged. Even so, City hopes of stronger growth had disappeared. Yet inflation is the issue rising up the UK agenda.
In America, interest rates have been pegged up two more notches, so it makes some sense to worry more about growth and less about inflation. In the UK, price increases seem to be accelerating.
Utility bills are top scapegoats for the targeted measure of annual inflation rising from 2 per cent to 2.5 per cent in just 61 days. But they are not the only causes for concern. Across the board, there are signs that businesses see the time is right to push through those relieving price increases they have wanted to make for months, while people understand that energy costs are rising. Price rises are more acceptable. Cars, food, tobacco and flat-pack furniture feature in this trend.
What is natural for retailers and manufacturers is nerve- jangling for central bankers. If price rises become more acceptable, inflation psychology could return. The traditional retail prices index has also moved up to 3.3 per cent. That could raise eyebrows at the Bank, too. As its own surveys of people’s inflation expectations show, ordinary folk still think that inflation is what the RPI, rather than the CPI, measures. In spite of Treasury urgings, the RPI remains the reference point for pay deals, especially indexed-linked deals.
If energy and other volatile prices are discounted, core inflation remains comfortably low in the UK, even though it has risen above the Fed’s comfort zone in America. Yet Mervyn King and his Bank colleagues will not feel comfortable if they think that energy costs are conditioning us to accept price rises across the board. They could be more anxious when they calculate that cuts in petrol prices kept inflation down in June and oil prices have gone back up since.
Minutes of the July meeting of the Bank’s Monetary Policy Committee will reveal this morning if anyone stepped up to the wicket to adopt the stance of the late David Walton, the MPC’s previous sole advocate of an early UK rate rise. There will surely be volunteers when the still depleted band of seven meets again at the start of August, but not necessarily enough to change policy. The next Inflation Report, whose thinking will colour the majority’ s votes, should still be under discussion. This is danger time for central bankers. Inflation is heating up while the economy is cooling down.
Markets should at least be warned that the MPC is contemplating a rise. Contradictory to the last, more UK fund managers think monetary policy is too stimulative now than in May.
Safe bet?
WHY pick on BetOnSports? It is one of the most puzzling aspects of the American internet gambling furore. If the federal authorities wanted to put a shot across the bows of the industry, it would surely have chosen a more high-profile target such as Sportingbet, which is considerably larger. And while David Carruthers, the unfortunate Scot who finds himself languishing in a federal detention centre, is well-known in Washington for his lobbying efforts, a higher-profile scalp would surely have been Sportingbet’s Nigel Payne, an even more regular visitor to America’s corridors of power.
Perhaps this is more about BetOnSports than the gambling industry in toto. The word in US political circles is that this case is about Gary Kaplan, the American founder of BetOnSports, who first came to the notice of the authorities in 1993 for running gambling operations in New York. He eventually went offshore and in 2004 — after a previous attempt in 2001 — successfully floated the company in London.
Quite why Mr Kaplan’s background did not fully come out at the time of the flotation, is perplexing, particularly as he retained a 40 per cent stake, now cut to 15 per cent. It may be that the London Stock Exchange was made aware of the concerns, but chose not to act.
Investors deserve to know exactly how much was known and whether the first the company and its advisers knew of the federal investigation really was when David Carruthers was arrested on Sunday evening as he got off a plane at Dallas.
Not so HIP
FIRST the Operating and Financial Review (OFR), then the Self-Invested Personal Pension (Sipp) rules. Now the Home Information Pack (HIP).
For a time, it seemed sensible to make directors issue an impossibly predictive analysis of their business in an OFR, then make them legally liable for its accuracy. It was also thought fair to let Sipps be used to give high-earners a 40 per cent tax subsidy to buy second homes. Somehow, HIPs were allowed to taxi towards the runway, too, before being recognised as costly and unnecessary burdens on sellers of residential property that would serve no useful purpose to homebuyers.
A skeleton HIP will still be compulsory, including a politically correct, bureaucratically nightmarish energy efficiency report, supposedly to satisfy our EU partners, most of which could not care less. But the likelihood of an imminent parliamentary mauling has led to the shelving of the most unattractive part of the HIP: the obligation to commission home condition reports.
As with the OFR and Sipps, the HIP idea was smuggled into Whitehall and turned into a jargonistic acronym and over-complex legislative proposals. In each case, common sense objections prevailed only after time and energy had been expended trying to bang square pegs into round holes.
Power low
NATIONAL GRID gave warning yesterday of shortfalls in the UK power supply. The unusually hot weather, which has driven demand for energy-hungry air conditioning, is partly responsible. Supply is also squeezed because summer, usually a slack time for energy demand, is the time when generating plants are shut down for periodically required repair and maintenance works. But although the pinch now being felt is temporary, it sends a timely reminder that the UK is far from having ample access to energy.
