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Your Money > Investing Comment Articles > Economic indicators; clear as mud
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By Richard J Hunter, Hargreaves Lansdown
As we have said many times before, the market intently dislikes uncertainty. It seems to be a parallel of human nature that we cannot prepare for what we do not know. December's inflation figure of 3% (in contrast to the Government's 2% target) was well covered in the Media and was followed by a lower figure of 2.7% for January just a few days ago. However, the Bank of England is not getting carried away by this, even though deflationary effects such as lower energy prices are likely to wash through later in the year. The Governor of the Bank of England made the point that "Just as 3% inflation didn't mean the end of the world was nigh, so 2.7% does not mean we can ignore concerns about inflation ahead." It seems that the economy is still on a path of firm growth, with higher business investment, pressure on wages (although in control at the moment, partially due it would appear to the continuing influx of cheaper immigrant labour in some key areas of the economy) and consumer spending all having their say. Consumer spending is one of the more difficult indicators to call at the moment. It is accepted now that the Christmas period was one of buoyancy, although the latest figures from the Office of National Statistics suggested that sales fell in January as consumers began to tighten their belts and react to that month's surprise interest rate hike. Unfortunately for those who like clean lines, these figures came a week after an announcement from the British Retail Consortium that High Street sales in January had seen their best performance for three years. The imminent raft of reporting figures from the banks should give some strong indication as to the health (or otherwise) of the UK consumer in debt terms - it is already the case that the UK tops the European league in terms of indebtedness - although some comfort has been drawn from the inexorable rise in house prices, so that it is mainly unsecured lending which has caused nervousness. The economists might even argue that we have a split economy. In London and the South East, where the markets have been strong (equities and property) and there has recently been another reported round of stellar bonuses to high flying investment bankers and the like, general inflationary pressure has of course increased. Such a rapidly growing pace can result in shortages, which drive up prices (rents/house prices), thus expanding profits, increasing consumption and therefore resulting in inflationary pressure. Meanwhile, the "traditional" economy continues to fight in the other direction, keeping a lid on production costs from which the consumer can benefit. The outcome of these estimates is a recognition that the UK economy is, and has for some time now, been finely balanced. The difficulty is that as more contrasting figures come along, so the MPC needs to react swiftly, anticipate the next course of action, whilst not choking economic growth unnecessarily. The enormity of this task is not one which the market underestimates and is one which it tries to factor into share prices. The current consensus is that there is probably still one more interest rate rise to come this year, probably up to 5.5% from the current 5.25%, and that should mark the end of this part of the cycle. Economic indicators tend not to be found on the list of racy subjects. However, inevitably they are key to investment decisions - let alone their impact on individual companies - and the more risk averse investors therefore try to diversify their holdings so as not to be exposed to just one economy at any point in time. To paraphrase the old stock market commentators, one thing is for sure about interest rates. They will either go up, or they will go down. Or they will stay the same. Useful links: |
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