Are Gordon Brown's bus passes an inflation-busting scam?

UK interest rates still look more likely to rise than fall - but has Gordon Brown hit on the perfect way to keep inflation in check?

Politicians will go to extraordinary and quite ridiculous lengths to keep the population happy.

As interest rates start to pick up across the world, the free and easy money that has been fuelling asset booms everywhere is drying up.

So inevitably, governments are clutching at straws in an effort to keep the party going for as long as possible. In Saudi Arabia, investors are to be given the chance to take a state-sponsored punt on the stock market more on that in a minute.

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Meanwhile, here in the UK, the Chancellor seems to have figured out a sure-fire way to keep inflation figures down by issuing free bus passes...

Consumer price inflation in the UK picked up in April, and is now back at the Bank of England's target level of 2% annual growth. The annual rate stood at 1.8% in March.

David Smith at Williams de Broe reckons that the Bank will raise the base rate to 4.75% in the summer. "There is quite a lot of potential inflation pressure in the system, not only in the UK, but globally."

The main driver behind the jump was a rise in air fares over the Easter holiday period. Easter fell in April this year, whereas it fell in March last year.

But other less benign influences were also behind the move. Soaring electricity, gas and water bills also contributed to inflation a trend that is likely to continue into this month's CPI figure.

And inflation would have come in even higher but here's where Mr Brown comes in. According to National Statistics: "A large downward effect came from bus travel, with average fares falling following the introduction this April of free off-peak local bus travel in England for people aged 60 and over".

So can we expect free bus travel to be rolled out across the country in the next Budget? We're not convinced that even Mr Brown is that crafty. But even if he is hoping to use statistical sleight of hand to keep interest rates lower, he's not likely to have much success.

One of the drivers of inflation has been the massive increase in commodity prices, and oil in particular. Oil has been a victim of the general sell-off over the past few days, but now seems to have stabilised at around $70 a barrel. That's still about 20% higher than at the start of this year.

Meanwhile, the rout in mining stocks also lost some momentum, helped by good news for BHP Billiton and Rio Tinto.

Germany's biggest steel mill, ThyssenKrupp, has accepted a 19% hike in the price of iron ore from the world's biggest iron exporter, Brazil's Companhia Vale do Rio Doce. As Bloomberg points out, the deal traditionally sets a global price benchmark.

Between them, Vale, Rio and BHP control 75% of the iron ore market. Right now, BHP and Rio are locked in negotiation with the Chinese steel industry. Chinese mills saw prices rise 71.5% last year, and they are unsurprisingly reluctant to accept further price hikes.

Japanese steel makers have been holding out too, but Daiwa Securities resource analyst Mark Pervan told Australian newspaper The Age that they would probably accept a similar deal quickly. He also believes the Chinese will succumb eventually.

A 19% hike would be above most market forecasts. The news battered shares in UK steel group Corus, which ended the day down 4% at 404.5p but wasn't enough to prevent BHP from falling 2% to £10.82, while Rio slipped 2% to £29.67.

The deal serves as a timely reminder that for all the fears that commodity prices have been over-inflated by speculators, there are genuine supply and demand concerns underpinning prices.

If you want to see a real bubble, you need look no further than Saudi Arabia. The country's Tadawul stock index has more than halved in recent months unsurprising, given that the average p/e ratio hit 47 at the market's peak in February.

But now - as we mentioned above - Saudi Arabia's King Abdullah has said that he wants to set up a state-backed investment fund, allowing small investors to put up to 500,000 riyals (that's over £70,000) into the market. Investors would get to keep any gains after two years, while the state will guarantee their capital.

According to the BBC, the king "hopes the fund will bring more moderation" to the Saudi stock market.

It strikes us that allowing the entire population to stick up to £70,000 into stocks while the state carries any losses is not a recipe for "moderation".

In fact, it seems like the perfect way to pump up another massive bubble which will no doubt explode in everyone's faces once the two years is up.

Maybe the king should stick to handing out bus passes.

Turning to the stock markets...

The FTSE 100 managed to edge higher, gaining 4 points to 5,856. Cruise ship group Carnival was the main loser, diving 12% to £23.26 as it issued a surprise profit warning, citing higher fuel costs and weaker bookings. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 gained 16 points to 5,081, while the German Dax fell 5 to close at 5,851.

Across the Atlantic, US stocks edged lower as investors remained wary. Data on housing was also weak, with the number of new homes being put into construction falling 7.4% in April, the largest drop in more than a year. The Dow Jones Industrial Average fell 8 points to 11,419, while the S&P 500 slipped 2 to 1,292. The tech-heavy Nasdaq fell 9 to 2,229, its weakest close this year.

Asian markets staged a modest recovery. The Nikkei 225 gained 149 points to 16,307, ending a six-session losing streak. Technology companies were among the main gainers, including digital camera group Canon.

This morning, oil was a little higher in New York, at around $69.60 a barrel. Brent crude was also rising, trading at around $69.50.

Meanwhile, spot gold headed back above $700 an ounce in early trading, before easing back to around $689.90. Silver edged up to around $13.77 an ounce.

And here in the UK, supermarket group J Sainsbury remains on the comeback trail, with full-year profits of £267m beating City expectations. But the company also warned that rising energy costs would hurt this year's results. And its banking unit made an operating loss of £10m due to increased bad debt charges.

And our two recommended articles for today...

How the dollar's collapse will lead to a new gold standard

- The dollar is headed for collapse, says Justice Litle in The Daily Reckoning, And with no real paper alternative to take its place, the return to a gold standard seems inevitable. To find out which countries will lead the way, click here: How the dollar's collapse will lead to a new gold standard

What is the carry trade?

- There's been a lot in the press recently about the 'carry trade' and how it has the potential to rock global markets. But what exactly is the carry trade? We carried a full explanation in MoneyWeek back in March - but if you'd like to refresh your memory in light of recent market turmoil, click here: What is the carry trade?