Gordon Clown .Com

The Confederation of British Industry has said today that the number of manufacturers intending to raise their factory gate prices soon has hit the highest level for 12 years.  This is the latest in a sequence of events demonstrating that inflation is back with a vengence, and that suppliers and retailers have rediscovered their pricing power.  With commodity prices and food ingredients prices soaring, price rises at supermarkets look set to continue for the forseeable future.  The collective coma surrounding oil depletion has led to soaring biofuel demand causing food prices to shoot up, a situation that is not likely to be reversed easily or soon.  Pricing power has returned to supermarkets who are seeking to rebuild profits following the energy price shocks of 12-18 months ago, and in view of the likely future ramp up in food costs.  Gordon and the MPC should be very worried indeed about this.  King has already linked climate change to an increase in biofuel demand and hence food price inflation - this is not an issue that is going to go away soon.

The CBI’s Industrial Trends survey showed that 32pc of manufacturers expect product prices to rise, compared with 8pc thinking that they will fall. The resulting rounded balance of +25pc was the highest since March 1995.

It came as oil prices hit a nine-month high of $72 a barrel, fuelling fears that higher petrol prices and transport costs could generate further jumps in inflation.

Brent crude was up $1.10 at $71.70 a barrel in late trading, lifted by concerns about the potential for military action against Iran, and strikes by state oil workers in Nigeria.

With mounting evidence that worldwide oil supply is near to peaking, or may indeed have already peaked, the long term trend in oil prices from here forwards is likely to be up, and up fairly quickly.  Oil is vital for everything the world economy does, so the price of all goods and services is likely to be affected.  There is no easy way out of this one.

Howard Archer, chief UK and European economist at Global Insight, said: “The CBI survey adds to the pressure on the Bank of England to lift interest rates by a further 25 basis points to 5.75pc sooner rather than later, and a back-to-back [increase] in June is currently looking like a real possibility. Furthermore, there is an ever-growing danger that interest rates will reach 6pc before the end of the year.”

George Osborne, the shadow chancellor, said: “It’s official: Gordon Brown is leaving the Treasury with the public finances in the worst state in Western Europe. You have to be truly incompetent to combine the highest taxes in our history with a budget deficit higher even than Italy’s.”

While problems on the world stage can take some of the blame, the MPC and Gordon Brown must shoulder the greater share.  Inflation is a problem for the US and Europe too, but it seems to be affecting the UK worse than most - our food price infltaion is far higher than the eurozone.  Perhaps it’s because the British economy is built on debt, with enormous monetary growth needed to keep everything ticking along.  Until it all goes wrong, of course.

As we draw closer to the local elections, a group of prominent economists have today put forward their argument for higher interest rates in an open letter to the Bank of England in which they state that inflation risks could surge out of control if the Bank does not raise rates soon and quickly.

Tim Congdon, Gordon Pepper and others have said that broad money (known as M4, and currently rising at 12.8% per annum) points to much higher inflation next year.  Congdon told the Telegraph:

“Inflation is back and it’s going to get to 4pc by the middle of the next year, even though I expect the CPI to fall back a little over coming months first.

“You can’t get away with money supply growth of 12pc or 13pc like this. It’s not as bad as earlier cycles, but it is nevertheless bad and it’s going to end the usual way. Rates will have to go to 6pc to 6.5pc, and may have to reach 7.5pc,”

Mervyn King is also concerned about M4, in opposition to other MPC members such as David Blanchflower who believe monetarism is dead and buried.

Mervyn King told the Commons Treasury Select Committee last month that he was watching the money supply closely. “I’m more concerned with monetary aggregates than some of my colleagues. To ignore it as a potential influence could lead into tricky territory.

“My concern about the money numbers is whether they are telling us something about the inflation numbers not in two years but in maybe three to five years,” he said.

Mr King’s comments were a veiled criticism of the doveish faction on the MPC, many of them political appointees picked by Chancellor Gordon Brown. Insiders at the Bank are said to be particularly scathing about the choice of David Blanchflower, best known for his academic opus Money, Sex and Happiness, an area of research viewed as frivolous by monetarists.

It remains to be seen whether the CPI measure will fall back to target later this year as the MPC has forecast, but they will be looking further ahead than that in making their rate decisions, and if the opinions of these economists are anything to go by, rates could have to go quite a bit higher than Gordon wants.  They are already paying the price for failing to raise rates quick enough in 2006, and now rates will have to go higher for longer.  With the “low inflation” pillar of his potemkin economy crumbling and about ready to collapse, how long will Gordon last in number ten?

Peter Spencer of the Ernst and Young ITEM Club economic think-tank has characterised the UK consumer as being addicted to credit, according to the latest ITEM club report.  The report says that while the outlook for growth remains reasonably good, most of that growth is likely to be based on borrowing, as consumers follow Gordon’s lead and steal from their future to pay for current consumption.  That has created a country that is complacent about risk, and an economy that is skating on thin ice.

“Many people are following the Chancellor’s lead and are borrowing to finance consumption.”

“Both as individuals and as a country we have borrowed a huge amount to support this growth,” Mr Spencer said.

“The bottom line is that we are all living beyond our means. In the short term, Mr Brown has resorted to borrowing for consumption. If the Chancellor is forced to borrow so much when the economy’s so sweet, what will happen when it turns sour?”

The report highlights the fact that the current account deficit has ballooned, despite a healthy economy and robust tax revenues. Government borrowing is higher than forecast, with overall public sector net borrowing now expected to be £34bn in 2007 to 2008, up from the £31bn projected in the pre-Budget report.

Mr Spencer said: “The UK’s current deficit has reached 3.5pc of GDP which suggests that as a country we are close to the edge. Ultimately, we are all skating - not to say wobbling - on thin ice. There’s a danger that we are slithering into complacency.”

“The current benign macroeconomic environment has made both individuals and corporates overly relaxed about risk, inflating asset values and transactions and boosting borrowing and spending,” it reads.

“Homeowners have been under pressure from rising tax and utility bills but all the indications are that they have kept spending as if it was going out of fashion. The saving ratio [the proportion of income people save] has fallen back to just 3.7pc meaning that many households are borrowing to finance current spending.

“Lenders have relaxed their criteria and we have been gearing up accordingly.

“The US sub-prime market, which now threatens to contaminate the rest of the mortgage market, provides a clear warning of what can happen when lending criteria become too lax.”

Growth in the UK economy was driven by the business and financial services sector. The report said the strength of the business sector was reflected in industrial confidence, mergers and acquisitions, fixed investment and employment.

“It also underpins the high value of the stock market and low level of corporate yield spreads, lowering the cost of capital and providing further impetus to M&A and business investment.”

However, the ITEM Club expresses grave concerns over long-term risks to the economy: “A major threat is building up in financial market gearing, asset valuations and overconfidence.

” These markets can turn on a sixpence. The relentless upward march of prices leaves them prone to relatively minor shocks, as we saw in February. Moreover, the burgeoning current account deficit leaves the UK prone to currency weakness.

“The problem is that if asset prices do not stabilise this will leave the UK, with its heavy dependence upon financial markets, vulnerable to a crash.”

Over recent weeks we have seen a growing realisation amongst journalists and newspaper editors that Brown’s economic miracle is not all that he has promised, and that he is likely to leave a trail of destruction in his wake as his desperate gambles with the British economy begin to unravel over the coming few years.  The group was joined today by Larry Elliot in the Guardian who believes that Brown’s single achievement and selling point for his stay as Prime Minister, the economy, is not the “inflation proof show-stopper” that has been claimed.

Britain has become a giant offshore hedge fund in which the viability of the balance of payments depends on the City’s ability to gamble more successfully than its counterparts in Frankfurt, Tokyo and New York, and where an excess of cheap money has allowed consumers to feed their spending habit, either directly through their credit cards or by using their homes as cash machines. The result is an economy in which the financial sector is the main source of growth, and which is even more heavily skewed towards the south-east of England than when Labour came to power. The gap between rich and poor is growing too.

In his budget speech last month, Brown boasted that inflation since 1997 had averaged 1.5% during his stewardship of the economy, half the level of the previous decade. This week’s figures showed it running at 3.1%, and that’s using the yardstick for assessing the cost of living - the consumer prices index - that is most favourable to the government. Until 2003, Brown used the retail prices index excluding mortgage interest payments, and on that basis inflation is running at 3.9%. Indeed, had the chancellor stuck to his old measure, King would have had to use his fountain pen in three of the past four months.

Using the all-items RPI, still the preferred benchmark for pay negotiations, prices are 4.8% higher than they were 12 months ago. That has left the City convinced that interest rates will be raised by the Bank of England next month and that further increases may be necessary later in the year.

Brown would say that, even if interest rates were to rise to 6%, that would still leave them where they were when Labour came to power. The problem is, though, that Britain is now so heavily in debt that even quite small increases in borrowing costs could hurt. They will certainly affect political sentiment, not least because it’s a good bet that quite a few voters would themselves secretly admit that spending more than you are earning - be it at a personal or a national level - is unsustainable.

In the past, periods of excess have been followed by king-sized hangovers, and we may be in for some pain this time as well. Brown is reluctant to talk down the pound, which would be one way of boosting exports, and a different mix of monetary and fiscal policy - higher taxes to dampen down consumption, offset by lower interest rates and a lower pound - is a political non-starter at the present juncture, given the scale of the increase that would be needed.

New Labour is ideologically opposed to more innovative ideas, such as a two-tier system of interest rates that would discriminate between money borrowed for investment and that used for speculation. Nor has it done more than dabble with the idea that there needs to be radical reform of land and property taxation in the UK to keep the housing market in check. Having been blamed, unfairly, for single-handedly destroying pensions, Brown is hardly likely to lay himself open to the charge that he wants to do the same to property.

A decade ago, a more activist industrial strategy - perhaps giving support to Britain’s fledgling biotech and environmental industry, as provided by competitor countries for their high-growth sectors - might have helped rebalance the economy, but it’s a bit late now.

Instead, Brown’s arrival in power will coincide with an economic slowdown of one sort or another. Either the chancellor will be successful in his attempt to put the squeeze on pay, in which case below-inflation wage deals will lead to falling real incomes, or deals will be struck at about the current RPI inflation rate, in which case the Bank will have kittens at the prospect of a wage-price spiral and keep on raising interest rates until higher unemployment drives the message home. A good way to overturn a 15-point opinion poll deficit? I wouldn’t bank on it.

The Daily Express has the pick of the bad news stories for Gordon today, with its frontpage headline suggesting that inflation could lead to base rate rises up to 6%, and consequently larger mortgage bills for homedebtors.  They also include a rather telling comment about Gordon’s handwriting, based on the signature in his letter to Mervyn King.

CRIPPLING rises in mortgage bills were forecast as “certain” last night after a shock leap in inflation.

Economists tipped the base rate to rocket over the 6 per cent mark, leading to eye-watering hikes in repayments for millions of home owners.

And the mortgage misery spelled humiliation for Chancellor Gordon Brown as the Bank of England took the unprecedented step of formally warning him that prices are running out of control.

Households now face punishing interest rate rises on top of spiralling costs for fuel and consumer goods as well as the biggest tax burden in history.

A quarter-point jump to 5.5 per cent will see payments on a £100,000 mortgage rise from £722.80 to £738.99.

But if interest rates peak at six per cent as predicted by some economists, the monthly payment will soar to £771.82 – an increase of almost £50 a month. Owners paying off a £200,000 home loan – the average price of a three-bedroom semi – will have to find an extra £1,176 a year.

At the same time there is the prospect of a summer of discontent, with huge pay de­mands by unions expected to keep wages in line with rising prices. Eco­nomist Phil Shaw, of international banking group Investec Securities, said: “The inflation figures make an interest rate rise a certainty, along with the possibility of another rate rise
bey­ond that.”

Figures due to be released today from the Office of National Statis­tics showed that inflation hit 3.1 per cent last month, way above the Treas­ury’s 2 per cent target.

The rise in the Consumer Prices Index – which does not include home loans – was up from 2.8 per cent in February.

The news sent shockwaves through global money markets, with the pound briefly passing over the two-dollar mark.

In exceeding the target by a full percentage point, the inflation rise reached the level where Bank of England Governor Mervyn King is obliged to provide the Chancellor with a written explanation.

It was the first time Mr Brown has faced such a letter. In it, Mr King warned that the Bank will almost certainly hike interest rates next month from 5.25 per cent.

He said: “The Monetary Policy Committee remains determined to set interest rates at the level required to bring inflation back to the two per cent target.” This was likely to have that effect on inflation “within a matter of months”.

He blamed an “unexpectedly sharp increase in energy prices” which had offset a fall in petrol prices, and he highlighted rises in food prices caused by global weather conditions hitting production.

Firms were also raising prices of consumer goods in response to “robust” spending by shoppers. “Furniture and furnishings rose by almost 10 per cent in March, a record rise,” his letter said.

Both the Chancellor and Tony Blair tried to shrug off the inflation nightmare yesterday. In his reply to Mr King, Mr Brown wrote: “Inflationary pressures have been a feature of the major industrial countries in recent times.”

Effectively backing further interest rate rises, he added: “I agree that the Monetary Policy Committee’s approach is appropriate to the Government’s monetary policy objectives, namely to maintain price stability.” Meanwhile, Mr Blair told his monthly Downing Street press conference: “There’s tremendous pressure on families all the time. I think it’s a feature of today’s world that people are stretched.” And he risked ridicule by claiming that Mr Brown was “the best Chancellor since the Second World War”.

Shadow Chancellor George Osborne said: “Gordon Brown’s reputation for economic competence is unravelling before our eyes.” Lib Dem Treasury spokesman Vince Cable said interest rate rises “will cause misery for thousands of people in severe debt who have borrowed up to the hilt to secure a mortgage. Debt servicing problems will only get worse.”

Howard Archer, economist at Global Insight, said: “This is a thoroughly nasty set of data that essentially guarantees that the Bank of England will raise interest rates.”

Graeme Leach, chief economist at the Institute of Directors, said: “The case for a further quarter-point rise cannot be in doubt. It looks like a done deal.” Louise Cuming, head of mortgages at moneysupermarket.com, said the increase had taken the City by surprise.

It threatened those trying to get on the property ladder. “If we don’t get new buyers into the market, the market will stagnate,” she added.

Tony Woodley, general secretary of the Transport and General Workers Union, said: “Employers had better get used to the idea that our pay claims this year are aimed at winning workplace victories on pay so that workers can afford to meet their rising living costs.”

Mr Brown’s reply to the Bank of England interested handwriting experts. Erik Rees, of the British Institute of Graphologists, said: “This is the handwriting of a man whose statements you have to check and check again. The fact the word sincerely is virtually illegible is very apt.”

Mervyn King was forced to write a letter to Gordon today after the Chav Price Index hit 3.1%, the highest level since the measure began in 97.  The RPI, a more true measure of inflation, rose to 4.8%.  Last time RPI was at these levels, interest rates were 7-8%, yet the Bank of England seems content that rates around 5% are enough to control inflation.  Evan Davis hit the nail on the head today when he asserted that the China deflator may not be having such an influence as before.  The Bank predicts CPI will fall back to target by the end of the year, but they have been incorrect with predictions in the past.  If this prediction were to prove incorrect, the timing could not be worse.  The letter, incidentally, was barely worth the 10-year wait, and was largely along the lines of “please don’t sack me”.
Meanwhile Gordon will soon face a vote of no confidence in parliament over the pensions fiasco, the Tories using an opposition day to table the necessary motion.  This being parliament, Gordon is unlikely to lose the vote, but another vote - the local elections taking place in the first week of May - could prove far more damaging for Gordon.

Seems like Gordon has finally relented and allowed the truth to be known on this one! Incredible really as just a few days ago he was claiming Britain had the strongest economy in years!

In a statement today, the Chancellor admitted that he had “put pressure” on the Monetary Policy Committee to keep interest rates artificially low in order to maintain his popularity as chancellor. Gordon Brown, who delivered his 11th budget speech recently, said that this was the only way to avoid sending the country into recession and causing precipitous falls in asset markets, including housing. The plan was to “fuel consumer spending”, Mr Brown said, with low interest rates encouraging people to “flock to the high streets of Britain in order to save the economy”.

Nice one Gordon! Get us all into massive amounts of debt, the likes of which have never been seen before, then run off to become Prime Minister just before the real pain starts to hit! Brilliant idea.

“I have now realised that while this plan was successful in the short term, it could lead to greater problems further down the line as debt increases. I will now make it my mission as Chancellor and perhaps soon Prime Minister to address this problem and get Britain back to its once great status as a stable thriving economy built on sustainable and sound fundamentals.”

Good luck Gordon. Because if the results of this come about soon, you won’t be spending much more time in Downing Street!

Update: April fool!

Pull the other one Gordon!  Seriously.  Barber, Lawson, Brown.  Inflationary chancellors.  Apparently Gordon says that we must not let inflation get out of control:

This is the right time to send a signal that we’re determined not to return to stop-go, that we’re determined to bear down heavily on inflation.

“Determined to bear down heavily” to the extent of dropping rates down to all time low levels and creating the biggest asset bubble ever seen in the history of Britan, eh Gordon?  Yes, we know what you mean.  Eddie George even admitted it a few days ago!

The Brown Boom - it will go down in history.  Only to be outdone by the Brown Bust.

Much as Gordon hates it, the MPC’s desperate flapping attempts to keep runaway inflation under control seem likely to lead to another interest rate rise, possibly as early as next week.  Swervin’ Mervyn King has commented that the rocketing money supply of 14% per year might - just might - be a sign that inflation is out of control.  Indeed with RPI already at 4.6% it’s hard to find anyone else who might have missed this fact - aside from Gordon of course. 

Desperate to keep rates down and voters happy, Gordon will no doubt attempt once again to knobble the MPC and fiddle the CPI figures for the umpteenth time.  The Office for National Statistics recently upgraded the weighting of fuel and oil in the CPI basket, a cunning move as with Oil prices currently lower than this time last year, they would at their current price be contributing to bringing CPI down from the current sky high 2.8%.  No sooner had they done this, however, when Iran stepped in and grabbed 15 Brits, which has helped push oil back up a few dollars per barrel.  And if the situation doesn’t get sorted soon, the price may rise yet more, and Brown and the ONS could be laughing on the other side of their faces.

Here’s what Merv had to say about M4:

Mr King said policymakers should ignore the recent increase in money floating around the UK financial system at their peril, saying it indicated that inflation would soon rise.
 
His comments, to the Commons Treasury Select Committee yesterday, underlined expectations that the Monetary Policy Committee is prepared to lift borrowing costs to 5.5pc either next month or in May.

Mr King said: “I’m more concerned with monetary aggregates than some of my colleagues. To ignore it as a potential influence could lead into tricky territory.”

“My concern about the money numbers is whether they are telling us something about the inflation numbers not in two years but in maybe three to five years. To ignore it as a potential medium-term influence could lead into potentially tricky territory.”

Eddie George, former Bank of England governor, today admitted that he and Gordon hatched a plan a few years ago to deliberately inflate the economy by keeping interest rates artificially low in an attempt to boost consumer spending.  In order to sustain demand in the flagging economy after the .com crash of 2000, Gordon and Eddie fiddled inflation figures and cut interest rates, desperate to keep the only remaining glimmer of hope alive - high street spending.  The side effects of this have been rampant inflation and an unsustainable boom in house prices, which now it seems can only end in tears for Gordon and the country.

“But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term.“But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States.

“That pushed up house prices, it increased household debt … my legacy to the MPC if you like has been ’sort that out’.”

He told the Treasury Select Committee - investigating the record of the first decade of the MPC: “We had to take action that on the whole we would prefer not to: stimulating consumer demand because all the other elements of demand had fallen away.

“And we were very conscious of the fact that that could give rise to problems in the future.

“We tried very hard not to do more than we needed to to keep within the inflation target limits but we knew that that was going to cause problems later on which are still with us.”

Gordon and the MPC have left us in a desperate situation of spiralling inflation and massive consumer and business debt.  There is only one way this can all end, and it won’t be pretty.