Good news on the inflation front!
The consumer price index (CPI) rose by 4.2% on the year before in June. That's still more than twice the Bank of England's target rate, but it was below expectations, and down on May's 4.5% rate.
So what was behind this tumble? And why aren't you feeling a lot richer?
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The fall was driven mainly by discount sales of computer games, cameras and TVs. The price of food is still soaring.
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So unless you replaced your telly last month, you won't have noticed your general day-to-day existence getting any more affordable.
And you can expect that to be the case for quite some time yet.
Don't expect interest rates to rise any time soon
Inflation may have surprised on the downside in June, but that's very unusual. Most of the time in recent years, it's been coming in higher than anyone expects.
That'll probably continue. You can check out our own inflation indicators here.
But these latest figures make it even less likely that the Bank of England will do anything about inflation. As we've discussed several times, the Bank is determined to keep rates on hold for as long as it can.
The Bank's justification is that with wages on hold, inflation is being driven by external forces, such as rising commodity prices. These are already hurting consumers. So why hurt them more by raising borrowing costs too?
It's a logical argument. But that doesn't mean it's the only view. You could equally argue that raising interest rates would result in a stronger pound. This would help to bring down the high cost of fuel and food (not to mention imported tellies) for British consumers.
You could also point to Europe, where the European Central Bank doesn't seem to be particularly concerned about the impact of rising mortgage rates on Spanish and Portuguese consumers.
But with Andrew Sentance gone from the Monetary Policy Committee, the Bank is firmly controlled by those who'd rather keep rates low. So what does that mean for the rest of us?
Britain faces 'benign stagflation'
The idea that we might face deflation in Britain falling prices is hard to believe. Even in the depths of the credit crunch, CPI never turned negative. The fact is that Britain seems to be able to rely on the generally frail nature of the pound to ensure that prices are always rising, regardless of the economic weather.
However, it's hard to argue with the Bank's view that much of today's inflation is still down to rising commodity prices. So if commodity prices were to come off, or even remain at similar levels, prices might remain uncomfortably high, but we wouldn't yet be looking at hyperinflation.
So what do we have? Graham Secker of Morgan Stanley dubs it "benign stagflation". This is what you get when growth is weak on one hand, and inflation is uncomfortably high, rather than running rampant.
Secker's view is that while commodity prices could ease, we'll still be subject to rising inflation in the likes of China. As emerging market costs and wages and currencies rise, those costs will be passed on to us.
This seems a pretty reasonable argument to me, certainly for the time being. So what sort of investments should you make for such times? Secker likes stocks with "pricing power". In other words, the sorts of companies who make goods that consumers need to buy, regardless of how tough times are.
These are in the main, blue chip defensive stocks, of the kind we've been tipping for a long while. My colleague Tim Bennett looks at Secker's piece in more detail in the next issue of MoneyWeek magazine, out on Friday. (If you're not already a subscriber, subscribe to MoneyWeek magazine.)
Consumer stocks are going to suffer
If you need any more convincing, tour operator Thomas Cook delivered all the evidence you could need yesterday. The company saw its share price fall a staggering 28% as it warned on profits for the third time this year. Analysts had expected operating profit to come in at £380m for the year to September. It's more likely to be £320m now.
The turmoil in North Africa hasn't helped. But the fundamental problem is that the group which hasn't hedged its fuel costs as cleverly as rivals - is having difficulty passing its costs through to hard-pressed consumers.
Now Thomas Cook, like any troubled company, will be having some specific problems all of its own. But this basic issue rising costs, struggling consumers will afflict all companies in sectors such as retail in the coming year. Sure, there will be specific situations where an individual stock looks worth buying on a 'value' basis. But in general, we'd be avoiding such sectors and sticking with the likes of companies that sell goods consumers class as 'needs' rather than 'wants'.
In the longer run, inflation looks set to become more than uncomfortable. Our Roundtable experts debated the best way to protect your portfolio in a recent issue of MoneyWeek. One suggested that he could easily see CPI hitting 8%, and the Bank still refusing to raise rates. If you haven't read the full story already, check it out here: The 12 stocks that will ride out the storms.
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This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
