Inflation abomination
The business news that matters today
Hello everyone and welcome to a bonus edition of Off to Lunch. We have missed a couple of editions this month due to the bank holiday and there is a lot of news around today, so let’s get into it…
Inflation has fallen below 10 per cent in the UK for the first time since last August, according to data out today from the Office for National Statistics. The consumer price index, the main measure of inflation in the UK, came in at 8.7 per cent in April, meaning prices are 8.7 per cent higher than a year ago, compared to 10.1 per cent in March.
But that is where the good news ends.
Inflation had been expected to fall by more than this because the year-on-year comparisons are now overlapping with the start of the war in Ukraine last year. The consensus among economists was that inflation would fall to 8.2 per cent. The Bank of England had forecast that inflation would come in at 8.4 per cent. Andrew Bailey, the governor of the Bank, was questioned by MPs on the treasury committee yesterday. It feels apt to pull out this quote from him during that hearing:
“I think there are some very big lessons about how we operate monetary policy in the face of very big shocks.”
Huw Pill, the chief economist of the Bank, added:
“We recognise that our forecasts of inflation have been too low and we’re trying to understand why we have made those errors.”
Bailey told MPs that the reasons for higher-than-expected inflation could include food producers buying ingredients earlier than they normally would due to uncertainty about their supply chains amid the war in Ukraine, a move that would lock inflation at higher levels for longer. He also pointed to the impact of extreme weather in northern Africa and an avian flu outbreak, which has led to shortages of salad products and chickens. Bailey added:
“These are genuinely things I think you can’t predict from period to period.”
A reminder of some of the context to this. The Mail on Sunday reported at the weekend that Bailey was telling business leaders in 2021 - in this case the director-general of the British Chambers of Commerce - that inflation “will sort itself out by September”. That story is here
Derek Halpenny, head of research for global markets at Japanese bank MUFG, gave a damning verdict on the latest inflation figures. In a note to clients reported by Reuters he said:
"There can be no sugar-coating of this data and it's a terrible inflation print that really sets the UK apart from other major developed economies in having a more serious inflation problem. The BoE will inevitably hike again in June and potentially in August as well.”
“Inevitably hike again” is a reference to interest rates going up. The base rate in the UK is 4.5 per cent but financial markets are now betting that the Bank could increase it to 5.5 per cent. The Monetary Policy Committee, which sets interest rates, is due to meet again on June 22.
Economists are particularly concerned about the latest figures because inflation rose on a measure that strips out food, energy, alcohol and tobacco, a measure which is called core CPI. On this measure inflation rose from 6.2 per cent to 6.8 per cent, the highest since March 1992. Food inflation also remains stubbornly and damagingly high. The price of food and non-alcoholic drinks was 19.1 per cent higher in April than a year ago, a small drop from the 19.2 per cent reported for March.
Jeremy Hunt, the chancellor, has been speaking at a Wall Street Journal event today and said that the UK can still achieve the government’s target of halving inflation. He said:
"It's still absolutely deliverable, but we have to stick to the plan and we have to recognise that this is not going to be easy.”
The FTSE 100 was down 1.6 per cent in morning trading after the figures were released. This is broadly in-line with falls in other European markets amid concerns about the US hitting its debt ceiling (as an aside, The Economist has done a useful piece on what a US default could look like here). The yield on 2-year gilts also moved sharply. I haven’t included this graph for a while but as you can see below the 2-year gilt yield is back to the levels it reached in the aftermath of Kwasi Kwarteng’s mini-Budget. This yield, remember, reflects the interest rate that the government pays on its debt and ultimately feeds through to the base rate. This graph shows 2-year gilt yields over the last five years. Not great…
Other stories that matter….
1. Shares in Marks & Spencer have risen more than 10 per cent today on the back of the high street retailer’s annual results. The company reported a 21 per cent rise in annual pre-tax profits to £476 million for the year to April 1. Sales rose 9.9 per cent, with like-for-like food sales up 5.4 per cent and like-for-like clothing and home sales up 11.2 per cent. What the City particularly likes about the results is that M&S is forecasting a “modest growth” in revenues again this year and has said it will resume dividend payments in November after halting them during the Covid-19 crisis. Stuart Machine, chief executive, said: “Despite facing significant headwinds, I am encouraged by the strong foundations established last year and excited about what we can achieve in the year ahead." M&S has undoubtedly got its confidence back, but it still has a lot of work to do, as its share price graph over the last 5 years shows…
You can read M&S’s results in full here.
2. Amanda Blanc, the chief executive of Aviva, has said she opposes proposals to force pension funds to invest in UK start-ups. Labour is working on plans for a £50 billion Future Growth Fund that would involve pension funds putting 5 per cent of their assets into a pot. This pot would then distribute cash to promising businesses in the UK. The Conservative government is thought to be working on similar plans, which are part of a drive to boost the long-term prospects of the UK economy and increase the allure of London as a place to list businesses. Rachel Reeves, the shadow chancellor, told the Financial Times earlier this week that she did not think pension funds would need to be forced to put money into the fund but added: “Nothing is off the table.” (Full story here). However, speaking as Aviva posted results today, Blanc told Reuters: "We're big supporters of investing in the UK. However, we are not supportive of a mandated participation. We do not feel that creating a complex and bureaucratic fund is the right way forward at all.” Full story from Reuters here.
3. New research from the Centre for Cities think-tank says that office attendance in London has recovered to 70 per cent of its pre-pandemic levels. This percentage rose sharply in 2022 but has flatlined since the start of the year, despite a renewed push by bosses to get more staff in the office. The research is based on Transport for London tube exit data and other surveys. The report says that the average central London worker is going to the office 2.3 days per week. The Centre for Cities warns there could be a negative impact on innovation and creativity unless people go back to the office more. Full report here and story by The Guardian here
4. In Monday’s edition I touched on Ireland putting health labels on alcoholic drinks and mentioned it was an interesting precedent. So is this: France has banned domestic flights on journeys that can be done by train in under two-and-a-half hours. BBC story here.
5. New research by the Financial Conduct Authority, the City regulator, says young people think more long-term about dating than they do about investing. The FCA said just 31 per cent of 18 to 40-year-olds are investing, in the sense of trying to make more from their money than they would by putting it in a savings account, and they are 18 per cent more likely to be influenced by social media when making investment decisions than they are about dating. The FCA surveyed 1,000 18 to 40-year-olds for the survey and it is part of a drive to encourage more young people to invest and invest sensibly. The research is here. As part of this drive, Celebs Go Dating presenter Anna Williamson, pictured below with the King, is hosting an event with the FCA for young investors called Swipe Left, Invest Right: How the Principles of Dating Can Be Applied to Investing
Podcast…
The new episode of Business Studies is live and it's a cracker, one of the best we have done. It looks at how Arm became one of the most successful and talked-about British technology companies ever. We speak to James Ashton, who has just written a superb book about the history of the company called The Everything Blueprint: The Microchip Design that Changed the World.
It’s a colourful story and the episode covers how the company was founded, what it actually does, how it grew, how it was sold to Softbank for £24 billion and what might come next.
There are all sorts of lessons for the UK in this story about how you build successful companies. Perhaps the main lesson is that there is no lesson - there is no magic formula to building world-leading tech companies. It's a story of brilliant people coming together at the right time and going for it.
Apple is key to the Arm story. There are some incredible facts in James's book. Arm started working with Apple to develop the MessagePad in the early 1990s. The MessagePad is regarded as a flop for Apple and was widely ridiculed for it in the 1990s. But it had lasting benefits for Apple. Apple made more money from selling its shares in Arm - $800 million+ - than it lost on the MessagePad. Plus, Arm's technology went on to play a key role in the iPod, iPhone and iPad. Sometimes what looks like a failure - the MessagePad - turns out to have bigger benefits in the long-term
You can listen to the episode on Substack here, Apple here and Spotify here
And finally…
I would say lots here about how great the latest episode of Succession was but 1) the people who have already watched it know that and 2) those who haven’t watched it yet don’t want it spoiled for them, and I know there are plenty of subscribers still catching up on all the events of series four. So, all I will say is this: I find it incredible that they filmed the main event in the episode, which lasts for most of the episode, in one take and that the actors didn’t know what each other was going to say beforehand. Secondly, James Cromwell has come a long way since Babe, although he was good in that too, and his speech in the episode was mesmerising. This is what The Guardian’s TV critic said about the episode…
Cromwell used the airing of episode as an opportunity to tweet his support for writers who are striking in the US…
I also want to mention the Sussex 2nd XI cricket team and Ravi Bopara. They had a ridiculous day against Middlesex 2nds at Richmond on Tuesday. Sussex scored 324-7 in a T20 match, a truly bonkers score, with Bopara contributing 144 runs from 49 balls, including 14 fours and 12 sixes. One over went for 38. The highlights are below…
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Best
Graham