Moneycorp: Retail Price Index expected to rise by more than 5% [15/02/2011]

Moneycorp: Retail Price Index expected to rise by more than 5% [15/02/2011]

The Ministry of Defence has certainly not been left behind by the era of instant communications. A couple of days ago it used the news media to notify trainee RAF pilots they would lose their jobs. Today it transpires the MoD sent an automated email to three dozen soldiers letting them know they would be laid off. In the old days these things used to be done in a much more personalised way: “Every man who’s going to be here for next month’s parade take a pace forward!.. Smith! Jones! Brown! Where do you think you’re going?!”

Technical levels
Resistance Support
EUR/USD 1.3650 1.3000
GBP/USD 1.6200 1.5500
GBP/EUR 1.2000 1.1550
Economic releases
LAST EXPECT
09:30 UK CPI 3.7% 4.0%
10:00 €Zone GDP Q4 (advance) 0.3% 0.4%
13:30 US Advance Retail Sales 0.6% 0.5%

The Business Secretary has been trying to do a similar media job with interest rates. He told a Bloomberg interviewer “There’s not very much evidence of British inflation taking place. It’s virtually deflation.” As for a decision by the Bank of England to raise interest rates, Vince said it was “potentially very difficult”. As red rags to bulls go, Mr Cable’s comment was a cracker. The undecideds on the Monetary Policy Committee could now be forgiven if they were to vote for a rate increase just to prove they are not in the government’s pocket.

It is not as if they will have any shortage of supporting evidence. The governor will by now have sent a third letter to his pen-pal, George Osborne, explaining why inflation is twice as high as it should be and what he might or might not do about it. The consensus among analysts is that today’s data will put the consumer price index (CPI) about 4% higher than a year ago and show the retail price index (RPI) to have risen by more than 5%. The argument is well-made that the weapon of tighter monetary policy is useless in fighting the effects of imported inflation and tax increases. However, the longer inflation remains high, the more it is likely to become entrenched. If the Bank is perceived not to care, nobody else will. Most people will not appreciate that with only the tool of monetary policy in its bag the Bank has the near-impossible task of getting out of a deep bunker with a three wood. As far as investors are concerned though, the Bank is going to have to try: they believe a high inflation number this morning will make a rate increase more likely and more imminent.

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With the CPI figures out of the way investors will transfer their focus to tomorrow’s Inflation Report but first they will have a few other data to consider. It’s GDP day for the euro zone. Figures for gross domestic product in the fourth quarter of last year have already shown shrinkage of -0.3% for Portugal and growth of 0.4% for Germany and France. The best guess for Euroland as a whole is 0.4% growth. Given that the French and German numbers came in slightly shy of forecast it is likely there will be a shortfall in the overall figure too but there is little chance it will emulate the UK and go negative.

Investors’ reaction to the GDP numbers will be hard to gauge because coming out at the same time will be the Euroland balance of trade and the ZEW surveys of economic sentiment in Germany and Euroland. After lunch another fusillade, this time from the United States, will deliver the import and export price indices, the New York Fed’s manufacturing index and January’s retail sales. Half an hour later the Treasury announces the capital flows for December and at three o’clock the NAHB housing market index reveals how miserable American house-builders still are.

It is very difficult to predict how sterling will react to the inflation data but it is a near-certainty that there will be a reaction of some sort. If that sends the pound your way, take advantage of it because there is almost sure to be a counter-reaction afterwards. If you want to automate the process, leave an order.

 

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