You reap what you sow

 

The good news is that across Europe and the US, inflation is heading lower. This is key to central bank interest rate policy, with markets anticipating a slower rate of interest rate hikes as inflation eases. However, some components of the inflation data are proving ‘stickier’ than others.

Clearly, Russia’s invasion of Ukraine has been a major cause of inflationary pressure, particularly energy prices. While some inflationary pressures are easing significantly, unfortunately, the same cannot be said for grocery prices with food inflation hitting 17% in the UK.

Talking of food prices, Clarkson’s Farm has been an unlikely hit. Like him or loathe him, Jeremy Clarkson and the team have received a special award for Flying the Flag for British Agriculture and raising the profile of British agriculture. As viewers will appreciate, farming in the UK faces a multitude of challenges, many perhaps self-inflicted, given the scale of official red tape and an apparent lack of preparedness for post-Brexit Britain.

Whilst a relief to some farmers, higher food prices feed into higher prices in supermarkets, but also within the eating-out sector, such as pubs and restaurants. The UK’s December inflation data   revealed that inflation within the services sector was proving ‘sticky’, as operators were having to raise prices to cover wages and energy costs as well as food ingredients.

Many sectors of the UK are experiencing strike action with wages lagging behind inflation. However, in January, Rishi Sunak vowed to cut the headline rate of inflation ‘in half by the end of the year.’ The Bank of England (BoE) expects inflation to ‘fall from the middle of this year and be around 4% by the end of the year.’  Although, the upside to risk to this central inflation forecast is the largest seen in its history according to Ben Broadbent, deputy governor of BoE Monetary Policy. Wages and the price of services in the next few months will be key determinants.

Besides food prices, the other global inflation risk is from the re-opening of the Chinese economy. Will the release of pent-up Chinese demand push prices higher and sow the seeds of inflation?

 

What have we been watching?

Last week was a relatively quiet one in regards to economic news. Markets continue to be supported by lower inflation expectations and hopes peak interest rates are not far away. However, the recent strong US jobs data has created an element of uncertainty. The US inflation data for January is due to be released on 14^th February and will now be key. Markets are expecting inflation of 6.2%, down 0.3% from December. Hopefully, if inflation continues to steadily fall, markets will ‘love’ it so let’s hope the data doesn’t disappoint and we see a Valentine’s Day massacre!

The US believes a suspected Chinese surveillance balloon that was shot down over its territory is part of a wider fleet that has spanned five continents. Meanwhile, President Joe Biden said that the US is ‘not looking for conflict’ with China. Asked if the ‘weather balloon’ incident has caused major damage to the relationship with Beijing, Biden said ‘no.’

Elon Musk’s SpaceX has limited Ukraine’s ability to use its satellite internet service for military purposes, after reports Kyiv has used it to control drones. Ahead of Russia’s anticipated Spring offensive, its forces appear to be focusing on securing the area around Bakhmut. Meanwhile president Zelensky visited the UK and EU with a view to securing more military aid, specifically fighter jets.

Sterling dropped back to under $1.21. This may reflect a combination of the recent strong US jobs data and broader global US dollar strength. Although ongoing tussles within the Conservative Party continue to create political uncertainty within the UK.

There was some good news for the government from the recent mild winter weather. Ministers now expect to spend £69bn on subsidising household and business energy bill compared with an initial estimate of £139bn. This may provide some ‘wriggle room’ for Chancellor Jeremy Hunt. Fourth quarter GDP was completely flat, which was in line with expectations. However, while the UK avoided recession in the second half of last year, markets are still expecting the economy will experience sharp falls in the first and second quarter of 2023 -the formal definition of recession.

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China saw inflation grow by 0.8% in January, slightly above forecasts, with the annualised rate at 2.1%.

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Brent oil picked-up to $85 on news that Russia is to cut production next month in retaliation for price caps imposed by western nations.

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Finally, talking of Valentine’s Day it looks as if we are now facing a ‘cost of loving crisis.’ Due to the spike in energy prices and cost of heating greenhouses, UK florists are having to pay 10%-15% more for red roses from Holland. However, who can put a price on true love? Well, Interflora have given it a pretty good go with the price of a dozen red roses up from £60 to £64.       

 

Read Last Week’s Alpha Bites – A shellfish act

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.