Inflation and Weak Pound Pressure Retailers

Inflation and Weak Pound Pressure Retailers

Trading Features / Strategies from Simon Denham of Capital Spreads.

Things are looking a bit perkier this morning after the Far East managed a bit of a burst higher after expectations that they might follow the late Friday falls of the US.

The ‘rose tinted’ view of data continues to drive markets as more and more reasons are found to buy shares even as the driving impetus of the actual economy seems to be stuttering once again.

As mentioned last week, before the surprising GDP numbers, much of the data over the past month has been rather less cut and dried in favour of a recovery than the headlines appear to have suggested.

For all of the economists’ readings of the tea-leaves much of their conclusions have been drawn from surveys rather than core data.

Gordon Browns duplicitous talk, much derided here over the past three years, about the UK economy being in a better position than any other to withstand a global downturn has now been shown to be so much hot air.

While the final numbers for the Public Sector debt for 2009/10 may well be under the ‘finger in the air’ number of £175bn the pathetic attempts by both political parties, so far, to really address the critical issue of too much state expenditure has seen at times like Nero fiddling whilst Rome burns.

The issue may be one of increasing tax revenue but as everyone knows increasing the tax burden is an operation of diminishing returns. Unfortunately the sacred cows of public sector spending will have to take the strain to an increasing degree.

I am less than convinced about the inflation data that we are now getting. In the past, the crying of the press over the numbers being too low has been unfounded in the face of the overall data.

I am now seeing across the board increases in food, toys, newspapers, fuel (again) and clothing that appear to be at odds with the current near 2% level.

Many of these items rely on imported goods to stock the shelves and, with marginal growth in the rest of the globe coming through to take up excess capacity, foreign exporters seem to be less inclined to ‘cut a deal’ with UK buyers to soak up the sterling weakness. Also see GBP/USD spread betting.

The fall in the pound at the fag end of last week was precipitous even by its standards. That forced the worst day since the collapse in January and this will not be helping with the pressure on retailers.

While the press is full of ‘winter of discontent’ warnings for the Government this pressure is likely to come solely from the public sector side of the equation.

The private sector is well aware that business is not good and the rising tide of the dole queue is not something that they can do a ‘King Canute’ in front of.

As such, the current administration might be in a good position to “appear to be strong”. The impact on the economy of state employees removing their services has less of an impact on the actual GDP or Tax revenue.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.

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'Inflation and Weak Pound Pressure Retailers' edited by DB, updated 26-Oct-09

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