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We’ve been talking a lot about inflation recently, but we’re not going to apologise – there’s a lot of it about.
Take Mexico for example. We’ve been worrying about the price of a loaf heading for the £1 mark – but pity the poor old Mexicans. They’ve seen the price of a corn tortilla – a staple in the country – soar in recent months. A kilogram of tacos now costs about a fifth of the daily minimum wage.
It’s mainly down to surging corn prices – they’ve hit a 10-year high as demand for corn for ethanol squeezes the amount of corn available for food, though the government is also pinning the blame on hoarding by traders.
It all means that Mexico’s central bank – which most analysts had expected to keep interest rates on hold for most of 2007 – now looks set to hike rates by a quarter point to 7.25% at its February meeting.
Of course, it’s not just the Mexican central bankers who might be eyeing a rate rise in February…
The pound hit a fresh two-and-a-half-year high against the euro yesterday as a survey from the British Chambers of Commerce showed that UK firms are driving up prices ‘at the fastest rate in nearly a decade’, according to Reuters.
Meanwhile, Monetary Policy Committee member Timothy Besley warned that a shortage of skilled workers could potentially push up wage inflation.
Wages of the most in-demand workers are already being pushed up rather substantially – vacancies in the City ‘soared’ in December, according to the Evening Standard, up 12.4% on last year. Robert Thesiger of Morgan McKinley told the paper: ‘It is unlikely there will be any wavering in the City’s appetite to hire this year.’
People have been holding onto their jobs until the bonanza bonus season has ended. but ‘no doubt there will be further fluidity once the majority of bonuses have been paid,’ said Thesiger.
And there really isn’t much sign yet that the Bank of England’s rate hike in November has had much impact on anyone. December’s mortgage lending was up 8% on the same month in 2005, according to the Council of Mortgage Lenders.
Leading on from this, Neil Collins in the Evening Standard makes the very good point that one reason that interest rates are likely to rise further than most people expect is because the BoE’s big stick just doesn’t have quite as much force behind it anymore.
As he points out, despite the interest rate rise, the yield on long-dated government bonds has actually fallen – when interest rates are rising, you would expect the yield on bonds to rise too, as investors normally expect to get a bigger return in exchange for putting their money away over longer periods. ‘The buyers who are keeping this bubble pumped up are pension funds [to match their liabilities]… and foreigners (who hardly care about UK inflation as long as the currency stays strong).’
In the end, as he points out, this is part of the reason why the broad money supply is ‘now roaring away at 14% a year’ – that’s the highest rate among major economies – ‘and it’s not obvious what the Bank can do about it.’
It may not be obvious what can be done – but there really is only one option open to the Bank, particularly if inflation gets a grip and decides to head above that 3% target and stay there – and that’s to keep hiking interest rates.
With all this inflation flying about, there is of course one asset you may want to consider investing in – and that’s gold. We won’t say anymore here – regular readers know how we feel about the yellow metal – but anyone who wants to find out why they should be holding onto their gold (or maybe buying a little, if they haven’t already) should take a look at this week’s issue of MoneyWeek, out today. Subscribers can download their copy here: Latest issue
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Turning to the stock markets…
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The FTSE 100 ended yesterday with modest gains, although Wall Street losses weighed during the afternoon. The blue-chip index closed 5 points higher, at 6,210, with pub operator Enterprise Inns making the biggest gains on in-line results and positive broker comment. For a full market report, see: London market close (/file/24292/london-close-early-gains-eroded-by-bernanke.html)
Elsewhere in Europe, stocks tracked Wall Street lower. The Paris CAC-40 ended the day 6 points lower, at 5,555, whilst the Frankfurt DAX-30 fell 12 points to end the day at 6,689.
On Wall Street, a disappointing earnings forecast from Apple weighed on the tech sector and sent the Nasdaq 36 points lower to a close of 2,443. The Dow Jones finished the day 9 points lower, at 12,567. And the S&P 500 closed 4 points lower, at 1,426.
In Asia, weakness in the tech sector also weighed on the Nikkei which lost 60 points to end the day at 17,310.
Crude oil was hovering close to the $50 this morning, having fallen 4c to $50.44. Brent spot was slightly higher, at $51.80.
Spot gold was trading at $528.40 this morning.
And in London today, shares in sugar company Tate & Lyle had risen by as much as 4% following a report in The Independent that the firm could be the target of a bid from a private equity group.
And our two recommended articles for today…
What the US minimum wage hike means for markets
– Congress voted to raise the US minimum wage for the first time in ten years this month. And according to economist Stephen Roach, it was an important milestone in the transition from a pro-capital to pro-labour climate. To find out what the latter would mean for financial markets, read: What the US minimum wage hike means for markets
Is copper the key to the gold price?
– Base metals and gold began 2007 with heavy losses. So where are they headed next? Paul van Eeden looks at what the markets are telling us – and why the future direction of gold is dependent upon copper. For more on likely developments in the world of base metals, see: Is copper the key to the gold price