Inflation is back- and nobody can understand why

March 25th, 2009 by admin | Filed under Daily News, Global Credit Crisis, Recession, UK Bank Accounts, UK Banks.

Governor of the Bank of England, Mervyn King was left with some egg on his chin yesterday when February’s inflation figures were announced yesterday. Instead of the expected inflation rate of 2.6%, representing a decrease of 0.4% from January, it was disclosed that the rate for the month had instead risen to 3.2%. This meant not only a rise of 0.2% but a disparagement of 0.6% from the Bank’s target.

It was estimated that the increase was largely driven by increases in food costs, due to the weak pound, according to figures provided by the Office for National Statistics (ONS).

It appears to be “back to the drawing board” for Dr. King and his crew, who appeared to leading the country to a period of consistent deflation, which was scheduled to reach 2% by April 2009. That target seems unlikely to be met, and Bank of England will be obliged to explain to his colleagues at the Treasury, as well as the British public as to what went wrong.

Without taking too much time to apologise and explain what went wrong with his deflation plan, Mervyn King instead cautioned Chancellor Alistair Darling that he should seriously curtail any plans that he had to instigate a second fiscal stimulus when announcing next month’s Budget.

The Bank of England governor warned that the current fiscal position in the UK is not one that could allow for another round of similar significant round of fiscal expansion.

On the FTSE yesterday, the mood of euphoria that had engaged Wall Street over the last 24 hours was not echoed. There were some rising stars; however banks and commodities, who had led the charge yesterday, appeared to be consolidating.

The highest flier on the day was the Innovation Group Plc whose shares shot through the roof, rising by a 72 percent (3.11 pence to 7.41). Innovation develop software for the insurance sector and may be on line for takeover, through a US based private-equity fund.

After news on their agreement to refinance their 215 million-pound banking facilities with Royal Bank of Scotland Group Plc. Broke, the Davenham Group saw their shares rise by 28 percent (3.25 pence to 15)

One of the U.K. -largest distributor of newspapers and magazines John Menzies Plc announced that they had successfully renegotiated contracts to distribute leading newspapers and magazines in the U.K. This good news sent their shares surging 27 percent (14.75 pence to 56)

Ukraine based iron ore producer Ferrexpo Plc were reportedly on the verge of announcing positive earnings for 2008, pushing their stock up 11.4 percent (6.75 pence to 66 pence)

The U.K.’s second-biggest water company, Severn Trent Plc are also scheduled to report their 2008 earnings figures. In anticipation, their shares rose 1.1 percent (11 pence to 1,025 pence).

SABMiller Plc the world’s second largest brewers enjoyed a conservative hike in their share value of 3.2 percent (31.5 pence to 1,030) on positive reports from their brokers.

Bank shares dropped almost five percent on average yesterday, after jumping by more than ten percent on Monday, on the news of the financial bailout from the US.

On the day, the FTSE 100 dropped 1.1 percent (41.35 to 3,911.46), having risen by 2.9 percent on Monday. The FTSE250 held its own closing at 6,403.55

As a result of a surprise rise in UK inflation last month, the pound was driven to a new high against the dollar on Tuesday

In New York, the pound climbed to $1.4690, an increase of 0.9% and did even better against the Euro and the Yen, rising by an average of 1.5%

Pound/US dollar 1.469

Pound/Euro 1.018

Pound/Japanese Yen 142.79

Pound/Swiss Franc 1.6571

Wall Street shares also took an understandable step backwards after the carnival atmosphere on Monday. The Dow Jones Average dropped 115.57 to close at 7660.29. Nasdaq also fell 37.785 points to 1517.99

In a report released on Monday, the e World Trade Organisation predicted that global demand for manufactured goods will plummet by almost ten per cent in 2009, representing the largest drop since World War Two.

Report explained that the dramatic trade slump was amplified as a result of a shortage of finance and growing protectionism.