Tag Archives:

CPI

Falling soft commodity prices are a piece of cake

Higher agricultural commodity prices at the start of the year raised concerns about the impact these could have on retail food prices, should the trend prove persistent. Fortunately, the price of soft commodities (coffee, sugar, wheat etc) appears to have decoupled from that of hard commodities (gold, silver, platinum etc) in recent months. Indeed, data from the last seven quarters indicate tha…

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The M&G YouGov Inflation Expectations Survey – Q2 2014

Today we are launching the next wave of the M&G YouGov Inflation Expectations Survey which aims to assess consumer expectations of inflation over the short and medium term.

With interest rates at multi century lows, central banks continue to inject large amounts of monetary stimulus into the global economy. Recent inflation rates in the US, UK and Germany have proved central to the current mark…

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UK inflation: the Bank of England would have to generate significant disinflation in the majority of goods we consume to hit the 2% inflation target, killing any recovery. Food and administered price rises are the problems.

With the UK’s 2% CPI inflation target having now been exceeded for 39 consecutive months, last week’s budget formally acknowledged the on-going situation and changed the Bank of England’s remit.

Although chancellor George Osborne maintains that medium-term price stability represents “an essential pre-requisite for economic prosperity”, the updated remit simultaneously introduces the concept of …

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Judgement Day – RPI Damp Squib

Today has seen the release of the decision by the National Statistician about what to do with the Retail Prices Index. We were told of the consultation in September last year, and were presented with 4 options, ranging from 1) to do nothing, to 4) to make RPI as much like CPI as possible.

Our view was always that the consultation arose as a result of the desire to correct an error made in the c…

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Markets start to think about inflation again

Over the last few weeks we have witnessed a meaningful bounce in inflation breakevens in the UK, Europe and the US. When breakevens are rising, it is a signal that the fixed income market is anticipating higher inflation than has been priced in. It also means that index linked bonds are outperforming conventional bonds. In the UK, the linker gilt of 2016 has outperformed the conventional gilt b…

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UK inflation shocking?

UK CPI inflation jumped from 4.0% to 4.5%, versus expectations of only a slight increase to 4.1%.  Core CPI, which strips out food and energy prices, soared from 3.2% to 3.7% and is now at easily a record high (data goes back to 1997).  One bank called the inflation numbers shocking, arguing other economies aren’t seeing anything like this surge in core inflation, UK monetary policy is too loos…

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Why the UK has a real rate problem

The financial crisis is resulting in the authorities, the public, and investment managers seeing things they did not expect to see. Today’s headline RPI level of 5.5% is a record 5% above the Bank of England base rate of 0.5%, resulting in a negative real interest rate (base rate – RPI) of -5%. This is the most divergent I’ve seen this in my 25 years in the city (see chart).

Real-interest-5%

The bond bears th…

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Hike Rates to Stamp out UK inflation. Really?

This week RPI broke through 5% and CPI broke through 4%. The media are almost universally calling for rate hikes, politicians are starting to voice their opinions loudly, and many investors are worried.

If the market reacts to higher inflation by pricing in more rate hikes, that’s bad news for gilts and index-linked gilts.  But for investors such as us who are trading so-called breakeven strate…

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Emerging market inflation – a big risk to global growth

The reasons behind the ugly scenes in Tunisia are down to a combination of political and economic factors, but at least part of the discontent stems from rising food and energy prices.  Public unrest in Tunisia has spread to Jordan, where thousands were protesting against the government over the weekend, and demonstrations are also spreading to Egypt (10 year US$ bonds are down 4% today, and th…

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It’s not 1993-1994 in the government bond markets. Unemployment is still way too high to provoke a Fed hike. But the Bank of England might be on the brink of a policy error…

US Treasury Bond Market in ‘93 -‘94
Government bonds have been selling off over the past month. Since mid October the 10 year gilt yield has risen from 2.85% to 3.63%, the 10 year bund from 2.25% to 3.00%, and the 10 year US Treasury from 2.40% to 3.40%.  The damage has been even greater in peripheral Europe – Spanish 10 year yields are up by nearly 150 bps over that same period.  Part of this reflects the return to a “risk on&#…

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