Inflation is Dead...Long Live Inflation

*** What your cat could have told you about the Old Lady.. *** Crude oil up, mining stocks up...a rumour at Shell...Boots heads for trouble...

*** MG Rover - a tragedy...the economy - a farce...bonds are a 'sell' and a 'buy'?!...and more.. -------------------

- So as your cat could have guessed, the Bank of England voted yesterday to keep UK base rates on hold yet again.

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- Clearly, inflation's not quite the problem they've been saying it is. Or else, rising prices ARE a big worry, but Tony Blair's vetoed a rate rise until after the Election. Either way, Mervyn King and his eight fellow wonks now seem as clueless as everyone else.

- 'The market is pricing in a 50/50 chance of a rate hike before the end of the year,' a currency strategist told Reuters last night, which sums up the City's opinion right now, but doesn't do much to help clear the fog.

- 'Buy bonds,' says David Kauders on page 8 of the latest issue of MoneyWeek, now winging its way to subscribers. 'Sell bonds,' says James Ferguson 12 pages later, writing for this week's excellent front-cover feature.

- Which way to jump? And when? The price of UK gilts rose Thursday, pushing the 10-year yield down to just 4.64%. Thirty-year gilt yields fell to 4.55%. So judging by the bond market's guess, 'Inflation is dead for the next 20-30 years,' as Kauders told the FT earlier this week.

- 'People simply can't afford to service any more debt,' Kauders went on. Paying down debt would mean a fall in the money supply. And that, as you know, spells 'deflation'.

- But with oil prices nearing new all-time highs again yesterday, investors would be foolish to discount inflation just yet. Shares in the FTSE Oil & Gas sector rose more than 2% on average, as crude rose once more to top $56 per barrel in New York.

- Indeed, it was a good day all round for most defensive sectors. The FTSE Miners added 1.2% on average...Electricity stocks rose 1.1%...Aerospace & Defence gained 1.3%...and Steel closed 2.7% up, as Corus recovered from Wednesday's sharp drop - caused by a downgrade from Morgan Stanley. It bagged the FTSE100's top spot, after closing 2.8% higher at 55.5p.

- Overall, the FTSE100 saw more than 80 of its constituent shares rise, adding 30 points for the day to 4,977. The mid-cap 250 index rose 0.3%...small company shares added 0.4%...and volumes were fair, with 2.9 billion shares changing hands in 240,500 deals.

- Royal Dutch-Shell led the oil stocks higher, adding 12p to £4.96 on a rumour it's hoping to extend its position in Australia's Woodside. Mining investors, meantime, were helped by a research note from Dresdner saying commodity prices won't peak until 2006. The bank's analysts also made BHP Billiton and Rio Tinto both 'buys', and told their clients to go 'overweight' mining shares.

- BHP added 3% to £7.22. Rio rose 1.7% to £16.96. Dresdner especially likes Rio's iron ore exposure.. -------------------

- Sugar-pushers Tate & Lyle got whacked Thursday by a profit warning from US giant Corn Products International. The shares finished down 15p at £5.12, the dog of the day amongst blue-chips. Boots the Chemist also got hit, losing 4p to £6.15, after opening the session up at £6.35.

- At first, City traders loved Boots' new plan to sell off its over-the-counter medicine business. But then they re-read the news...and spotted that Healthcare International makes big-name brands including Nurofen and Clearasil.

- Boots also said it plans to raise £250m by selling and leasing back some 300 stores. But it's going to need all the cash it can get if business doesn't pick up soon. Same-store sales at the group's core shops fell by 0.9% in the three months to March.

- The High Street's other ex-favourite, Marks & Spencers had a good day in court meanwhile, but a poor day in London. A judge in Brussels said the British government was wrong to stop Marks's claiming tax-relief on losses it had made overseas. Shame that M&S shareholders can't claim back the money they've lost, however.

- Marks's shares struggled to add just over a penny on Thursday, to stand at £3.43, some 15% down from Philip Green's offer of summer last year.

- Outside the stock market...about 100 miles to the north-west, in fact...and grim news for the 6,000 people still building cars in Longbridge. Production at MG Rover was suspended as the stock of components ran out, thanks to local suppliers refusing to extend the firm credit.

- 'The implications are devastating,' said Peter Beale, one of the 'Phoenix Four' who bought Rover from BMW for a tenner in 2000...and then paid themselves £16m in one year, while the company lost £89m.

- Phoenix Holdings now wants the government to give Rover a £100m loan, while it tries to close a bail-out package with SAIC, a Chinese carmaker. 'If the bridging loan is not offered to us by the government,' Beale told the BBC yesterday, 'we are facing now the tragic closure of Longbridge.'

- Tragic indeed...what with an election approaching, and Birmingham Northfield being a marginal seat.

- And more bad news for Gordon Brown's 'miracle economy' yesterday; the miracle being that anyone's fooled. Factory output fell 0.5% in February, the Office for National Statistics said yesterday. This marks the first drop in six months...and brings us back to those bond yields again.

- 'If we continue to get weak data,' says an analyst on the newswires today, 'there's scope for sterling weakness from the interest rate outlook.' The theory runs thus, dear saver:

- Weakening output will put the kybosh on a further interest-rate hike...making the pound less attractive to foreign investors...causing sterling to dip...import prices to rise...and inflation to rocket.

- Buy bonds! Or sell bonds! Just be quick!

Adrian has written all things gold related from if it’s worth buying, what the real price of gold should be and what’s the point of gold for MoneyWeek. He has also written for other leading money titles on his gold expertise including Business Insider, Forbes, City A.M, Yahoo Finance and What Investment Magazine. Now Adrian is head of the research desk at BullionVault, a physical market for gold and silver for private investors online.