Introduction: Bank of England ratesetter warns against being ‘seduced’ by lower inflation
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
One of the Bank of England’s hawkish policymakers has warned that the UK should not be “seduced” by the recent fall in inflation, given underlying price pressures in the economy remain strong.
Catherine Mann, one of four policymakers who opposed this month’s cut in UK interest rates, argues that services inflation remains too high for comfort, and that UK wages are rising faster than the Bank’s models would predict.
Speaking to the Economics Show with Soumaya Keynes podcast, released this morning, Mann explained that while goods inflation has fallen, services prices were still rising at over 5% per year – which, she feels, is not compatible with keeping headline inflation sustainably at 2%.
She says:
Inflation has come down but if we look underneath the headline, we should not be, in the UK — and I think that’s true in the US as well — we shouldn’t be seduced by headline inflation because of the role of energy and external aspects working through both directly energy as well as on the goods side.
Mann fears there is an “upward ratchet” effect within the services sector, as services prices rarely fall. Part of that process is “the desire to maintain certain wage relationships”, she says – once the lowest-paid workers at a company get a pay rise, those above them push for one too
Mann explains:
There was a lot of new wage agreements in April this year. There will be wage negotiations next year, which will be in relationship to the negotiations that just happened. So some people at the bottom got quite a bit of an increase, rightfully so.
But the ones above them didn’t, which means next year they will, because it’s important to keep relative wages within a hierarchical structure, kind of in relationship to each other.
In April the national living wage rose to £11.44 an hour, an increase of almost 10%.
Good producers can also deploy the ratchet technique to push up prices, Mann points out – which may take a long time to “erode away”.
She says:
Firms look at their competitors and their competitors raise their prices a little bit. Maybe they’re more efficient. They raise their prices a little bit, and their competitors raise it too. We do not see that behaviour on the downside.
Mann also anticipates upside risks to goods inflation from higher shipping and transportation and all the issues in the Middle East, while wages keep rising faster than the Bank’s models would predict.
Mann explained:
“It takes multiple years for wages to catch up to all these desired real wages that workers want to have. And when it takes a long time, that means going forward, it’s going to take a long time for wage deceleration to move us into a position where services (inflation) will decelerate.
On a scale where one is ultra-dovish, and 10 is ultra-hawkish, Mann put herself as a 7 – down from a 10 in the days when she was voting to increase interest rates above their recent 16-year high.
She, and three other members of the monetary policy committee, were outvoted by the other five members of the MPC at the start of this month, when UK interest rates were cut to 5% from 5.25%.
Inflation data due on Wednesday is expected to show a rise in UK CPI inflation, from 2% to 2.3%.
However, the latest labour force statistics due tomorrow morning are tipped to show a slowdown in wage growth…
The agenda
Key events
Ukraine’s incursion into Russia’s Kursk province last week is also adding to geopolitical tensions today.
Susanah Streeter, head of money and markets at Hargreaves Lansdown, says its another factor pushing up the oil price:
For the moment, oil prices are rising, offering immediate support to energy giants, with BP and Shell on the front foot in early trade.
The benchmark Brent Crude has risen back above $80 a barrel, sparked by fresh supply concerns, driven by rising tensions in the Middle East and between Russia and Ukraine.
This flurry of upwards momentum follows a considerable decline since the start of July, partly driven by concerns over the US economy. But more positive US jobs data released last week eased concerns about an American recession
Although the EU has banned imports of crude oil from Russia, Moscow has redirected oil shipments to China, and also used a ‘shadow fleet’ of vessels to evade Western sanctions.
Brent crude rises over $80 amid Middle East tensions
The oil price is rising for the fifth day in a row – dampening hopes that cheaper energy will keep inflation down.
Brent crude is up 0.75% this morning at $80.26 per barrel, the highest since Friday 2 August.
This is the first time in over a week that Brent has traded over $80/barrel. It hasn’t risen for five days in a row since February.
Rising energy prices feed through to goods inflation – bolstering Catherine Mann’s warning this morning that the fight against UK inflation isn’t over.
Ricardo Evangelista, senior analyst at ActivTrades, says tensions in the Middle East are lifting oil prices, as are fading concerns about the US economy.
Both supply and demand factors are bolstering oil prices as the outlook for the US economy becomes more positive and fears persist of an all-out war in the Middle East involving Iran and Israel.
Last week’s US economic data eased fears of a recession in the world’s largest economy, improving the outlook for oil demand. Simultaneously, there are growing expectations that Iran may launch a military operation in retaliation for Israel’s assassination of Tehran’s regional allies.
If this occurs, it will likely lead to a rapid escalation that could engulf the world’s main oil-producing region in a conflict, severely disrupting the global crude supply. Against this backdrop, there may be further scope for oil price gains.
Yesterday, the Pentagon said US defence secretary Lloyd Austin has ordered the deployment of a guided missile submarine to the Middle East amid escalating tensions in the region.
Our Middle East liveblog has more details:
Building products supplier Marshalls continues to be hit by the weak UK house-building markets.
Marshalls has reported that revenues fell by 13% year-on-year in the first half of this year.
This was principally due to its Landscape Products division, which produces paving slabs, driveways and garden walls, and suffered from low levels of new build housing and less spending on private housing repair, maintenance and improvement.
Marshalls says it remains “cautiously optimistic of a modest recovery in its end markets during the second half of the year”, so long as the macro-economic environment improves.
Last summer, Marshalls cut 250 jobs and issued a profits warning as demand weakened.
UK employers expect to agree smaller pay rises
Catherine Mann will be pleased to hear that employers in Britain expect to hand out the smallest pay rises in two years.
Workers, though, will be disappointed as they try to recover from the impact of the cost of living squeeze.
The Chartered Institute of Personnel and Development has reported that that bosses expect to raise wages by 3% over the next 12 months, down from 4% predicted three months ago.
It surveys 2,000 employers to judge their pay plans – discovering that median basic pay increase expectations fell from 4% to 3% in the private and voluntary sectors and from 3% to 2.5% among public sector employers.
James Cockett, senior labour market economist for the CIPD, says:
“Falls in expected pay rises were anticipated now inflation is within a tolerable range for employees.
However, many workers will still feel worse off than they did a couple of years ago, so other benefits like providing flexible working, offering benefits that help boost take home pay, and taking steps to improve job quality, are in employers’ interest to help both support and retain staff.”
India’s Bharti Enterprises to buy 25% stake in BT from Drahi’s Altice
Jasper Jolly
BT’s shares have soared over 8% this morning, after Indian conglomerate Bharti Enterprises announced it will buy the stake owned by billionaire Patrick Drahi’s struggling Altice.
The move means Bharti will replace Altice as BT’s largest shareholder, with 24.5% of its stock.
The Indian group flattered the new Labour government, saying that it was “a vote of confidence in the UK as an attractive global destination for investment, with a stable business and policy environment attractive for long-term investors”.
Yet the sale – at an undisclosed price – also reflects the difficulties facing Drahi’s empire. It bought the first part of the BT stake in 2021, but is now struggling under a $60bn (£47bn) debt load, after apparently being taken off guard by rapidly rising interest rates, and is also dealing with corruption allegations that prompted a Portuguese criminal investigation.
Bharti says it has no intention of making an offer to acquire the Company, and is applying voluntarily for UK National Security and Investment Act clearance.
In the travel sector, Heathrow has been racking up its busiest weeks ever – despite a new £10 charge for passengers on some routes.
Heathrow says it handled almost 8 million passengers in July – including a record-breaking 1.8m passengers per week, three weeks in a row. There were “no material impacts on flights” from the CrowdStrike global IT outage or from protests, it says.
Heathrow CEO Thomas Woldbye (who has clearly been enjoying the Olympics) says:
“Team GB’s performance in Paris has been an inspiration to the nation and to Team Heathrow. In July, we were smashing a passenger record almost every single day and we’re chasing down our never before seen goal of serving 8 million passengers in a single month.
I’m proud that although there were a few potential challenges which could have caused us to stumble, our team remained focused on the prize of making every journey better and delivered a medal-winning start to the summer getaway.”
However, Heathrow also reports that it has missed out on 90,000 transfer passengers sine 2023 due to the ETA scheme, which adds a £10 charge for overseas travellers using UK airports to connect to other flights from seven countries.
“This is devastating for our hub competitiveness,” it adds.
FTSE 100 chief executive pay reaches highest level on record
Britain’s bosses won’t need to worry about rising inflation hitting their wallets and purses.
Pay for the bosses of the UK’s 100 biggest listed companies has increased to the highest level on record, with the average chief executive paid more than 100 times the average full-time worker in Britain.
Analysis by the High Pay Centre showed median pay for a FTSE 100 chief executive increased from £4.1m in 2022 to £4.19m in 2023.
The campaign group said this was the highest level on record, although growth in chief executive pay was slower than in the past two years, when there had been a bounce after the height of the Covid pandemic.
Pascal Soriot, the chief executive of the drug company AstraZeneca, topped the list of highest paid bosses in the FTSE 100 for a second year running, collecting £16.85m, up from £15.3m in 2022.
FTSE 10 claws back all last week’s losses
In the City, shares have opened higher, with the FTSE 100 gaining 54 points or 0.66% to 8221.
That’s quite a contrast from last week, when the Footsie tumbled by 2%.
Today’s gains mean the index has clawed back all last week’s losses, and is trading at the highest level since Friday 2 April.
The UK FTSE 100 has broken back above 8200 this morning.
— Shaun Richards (@notayesmansecon) August 12, 2024
You can hear the podcast here:
On the economic picture, Mann says there’s been “a bit of a reversal of fortunes” between the UK and the US over the last year:
The US economy, it’s still doing quite well, but it has slowed and inflation is a little bit sticky, but not too bad.
And the UK economy, by contrast, has come out of last fall’s technical recession with, I think the best word to use is a resumption of growth because it’s not robust, but it has resumed.
Mann: We must lean against market volatility
The recent volatility in financial markets may be a sign that interest rates should be higher than would otherwise be the case, Catherine Mann argues.
She explains that volatility – in markets, in asset prices, and even in economic data – creates an “inflation premium”.
And that can mean that monetary policy “is not as restrictive as you might think”.
Mann explains:
If we think that we’re into a world where there’s more commodity volatility, where there’s more real-side volatility, where there’s more, in this case, spillover volatility from other places, we have to acknowledge that volatility adds to the situation with inflation. And so we would have to lean against that.
Last week’s market tumble was triggered, in part, by concerns that the US central bank had blundered by not starting to cut interest rates as America’s economy slowed.
Mann argues that if the US economy prospects are less robust than we thought, that would hurt the UK economy.
It should also support sterling – which economic theory suggests would put downward pressure on inflation because import prices are lower.
However, Mann says this isn’t actually true, according to research:
The appreciation does not put downward pressure on domestic prices because demand is relatively stronger than we thought.
Introduction: Bank of England ratesetter warns against being ‘seduced’ by lower inflation
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
One of the Bank of England’s hawkish policymakers has warned that the UK should not be “seduced” by the recent fall in inflation, given underlying price pressures in the economy remain strong.
Catherine Mann, one of four policymakers who opposed this month’s cut in UK interest rates, argues that services inflation remains too high for comfort, and that UK wages are rising faster than the Bank’s models would predict.
Speaking to the Economics Show with Soumaya Keynes podcast, released this morning, Mann explained that while goods inflation has fallen, services prices were still rising at over 5% per year – which, she feels, is not compatible with keeping headline inflation sustainably at 2%.
She says:
Inflation has come down but if we look underneath the headline, we should not be, in the UK — and I think that’s true in the US as well — we shouldn’t be seduced by headline inflation because of the role of energy and external aspects working through both directly energy as well as on the goods side.
Mann fears there is an “upward ratchet” effect within the services sector, as services prices rarely fall. Part of that process is “the desire to maintain certain wage relationships”, she says – once the lowest-paid workers at a company get a pay rise, those above them push for one too
Mann explains:
There was a lot of new wage agreements in April this year. There will be wage negotiations next year, which will be in relationship to the negotiations that just happened. So some people at the bottom got quite a bit of an increase, rightfully so.
But the ones above them didn’t, which means next year they will, because it’s important to keep relative wages within a hierarchical structure, kind of in relationship to each other.
In April the national living wage rose to £11.44 an hour, an increase of almost 10%.
Good producers can also deploy the ratchet technique to push up prices, Mann points out – which may take a long time to “erode away”.
She says:
Firms look at their competitors and their competitors raise their prices a little bit. Maybe they’re more efficient. They raise their prices a little bit, and their competitors raise it too. We do not see that behaviour on the downside.
Mann also anticipates upside risks to goods inflation from higher shipping and transportation and all the issues in the Middle East, while wages keep rising faster than the Bank’s models would predict.
Mann explained:
“It takes multiple years for wages to catch up to all these desired real wages that workers want to have. And when it takes a long time, that means going forward, it’s going to take a long time for wage deceleration to move us into a position where services (inflation) will decelerate.
On a scale where one is ultra-dovish, and 10 is ultra-hawkish, Mann put herself as a 7 – down from a 10 in the days when she was voting to increase interest rates above their recent 16-year high.
She, and three other members of the monetary policy committee, were outvoted by the other five members of the MPC at the start of this month, when UK interest rates were cut to 5% from 5.25%.
Inflation data due on Wednesday is expected to show a rise in UK CPI inflation, from 2% to 2.3%.
However, the latest labour force statistics due tomorrow morning are tipped to show a slowdown in wage growth…