How green energy is fuelling inflation

The world's Central Banks surprised nobody. The Bank of England raised UK base rates by 0.25% to 5.5%. The vote was unanimous and it is almost certain to be followed by a similar rise, probably in June. There was some fear of a 0.50% increase and the subsequent publishing of the Minutes confirmed that a discussion did take place. The effect of Bank of England tightening is being felt; demand for home loans is reducing, consumer credit has slowed and levels of savings are increasing. The credit crunch is now being felt - no wonder Stuart Rose is voicing concern.

Our view remains that inflation is more about asset inflation than consumer prices although other extraordinary forces are imposing themselves. The growing biofuels industry is increasing the demand for certain soft commodities and is driving food prices higher, after all, corn is also a staple diet for livestock, if livestock feed is more expensive then the meat on the table is more expensive. John Parker, Food Analyst of Deutsche Bank says that we are heading for the biggest rise in food prices for 30 years and that there is a growing concern within the food industry that the present upswing in soft commodity prices is structural rather than cyclical.

The recent UK CPI figures show annualised food price inflation at 6% in April. Higher interest rates, rising energy prices and higher food costs will further undermine discretionary spending and cause inflation to rise.

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How this will impact upon the long end of the gilt market remains to be seen; currently, prices are stable but at lows for the last twelve months, so we are watching very carefully. We remain convinced that there will be an inverse correlation with stock markets if they start to fall and as we are expecting such an outcome, the future for gilts should be good.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.