HC-AM Morning Report - Inflation: One Size Does Not Fit All

Good Morning,

Here are this morning's headlines...

ONS- Yesterday, the ONS announced that they would be publishing a new index to better track the effects of inflation on a wider aspect of society.?The new index will be called the Vimes Boots index, in a nod to the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness – featured in Terry Pratchett’s, Men at Arms novel. Under the existing system, the ONS maps the price changes of a basket of some 700 goods and services intended to represent the buying habits of those across the British economy. However, the headline inflation figures do not provide an accurate representation of how inflation affects each individual person based on their shopping habits. Concerns over the increasing cost of living have acted as an impetus for activist and food writer, Jack Monroe to engage in dialogue with the ONS to try to better understand the implications of inflation across much broader aspects of society accounting for wider “income levels and household circumstances”. For instance, Monroe documented that a bag of 29p pasta was no longer available, and the next cheapest alternative was 70p, representing a price increase of 141%. Hence, Monroe argues that current inflation figures do not provide a sufficiently meaningful perspective. Moreover, Monroe considers that the price changes of basic and value goods which are seen as non-discretionary for many in society are often insufficiently tracked.?The technological revolution will have a primary role to play in this new index, and its ongoing development, given that prices will be captured directly from supermarket checkouts which will subsequently allow hundreds of millions of data points to be captured. Therefore, while under the existing system the price of pasta is merely noted by a few data points, this method will allow price information to be retrieved relating to different varieties of pastas, in different shops, across different locations. It is estimated that while the ONS currently collects data on 180,000 prices relating to the 700 goods and services the new index could collect some 400 million data points.?

UK Inflation- Staying with inflation: Rishi Sunak’s planned rises to National Insurance are set to fuel inflation, according to the Treasury committee. The logic is that half of the NI burden is to be borne by companies, which in turn will put further pressure on them to increase prices. The committee also has concerns that we could be heading into a wage price spiral - where wages increase to meet inflationary pressures, so demand doesn’t soften, and prices continue to rise as input costs grow. They also level concern that higher inflation will cost the Treasury more in debt service costs, though there is an argument that it will force higher wages and therefore greater tax receipts from the exchequer. It should be noted that the committee is predominantly made up of Conservative MP’s who are already frustrated that their party is no longer the party of low taxes, however their arguments are justifiable.

Boris Johnson- Boris dodged the Sue Gray report yesterday, which we might now have to wait until next week for, as legal teams comb through the report and make sure nobody is unduly thrown under the bus and that the publishing of it won’t compromise the Met Police investigation. It’s not all good news for Boris though, as yesterday it also emerged that as the Taliban advanced on Kabul and the British Army underwent Operation Pitting to evacuate diplomats, troops and Afghans who had put their lives in grave danger to assist ISAF, the PM expressly intervened to authorise the evacuation of 173 dogs from a charity. The poignant scenes from Hamid Karzai International Airport demonstrated that space on the evacuation flights was in short supply and military resources stretched, and hence these recent revelations appear to contradict Ben Wallace’s comments at the time which stated that government would not "prioritise pets over people". These revelations appeared after two emails were realised by the foreign affairs select committee which refute the PM’s earlier comments that he had not made such interventions and has thus prompted many to argue that he has since misled parliament.

FOMC- Across the Pond, the FOMC kept the base interest rate unchanged at 0.25% which met market expectations. However, given inflation in the US standing at 7%, the Fed also warned that the pace of rate rises could well be faster than we have seen previously, and this has given the markets some cause for concern as a result, with equities lower and the dollar higher as US bonds become a more favourable asset to hold. Fed chair Powell said the US was near full employment and as such he thinks raising rates at a pace isn’t going to come at the cost of greater unemployment. Markets now expect US rates to end the year at 1.75%, which means six 25 basis point hikes between now and then.

Ukraine & Russia- On the geo-political front: The US has delivered a written response to Russia’s security guarantees proposal and though a veto on Ukraine ever joining NATO is still a red line for Washington, there are apparently points within the response that will pave the way for dialogue. The next step is for Anthony Blinken and Sergey Lavrov to get together and continue with dialogue. The continuous simmering and threat of sanctions continues to hurt commodity prices and not just gas; Russia provides almost 20% of the world’s wheat, 13% of its oil (which surpassed $90 per barrel yesterday), and around 10% of the copper and aluminium. Hence, traders and refiners of these raw commodities are understandably nervous that if sanctions were to be levied then these prices would spiral.

Looking Ahead- Today’s data is largely US-centric with Q4 GDP, personal consumption and durable goods orders being printed at 1.30pm. This morning we’ve seen German consumer confidence come out low, yet still slightly better than expected – to be fair, European markets have been digesting the news from the Fed since the opening bell, with the German DAX down 1.6%, the French CAC down 1% and the FTSE the smallest loser with just 0.1% off the top so far.

Have a great day

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