Why Higher Inflation Is A Gift To The Unions

So. Mervyn wrote his letter. And Alistair replied.

You can read them both on the Treasury and Bank of England websites. But if I were you, I’d spare yourself the pain...

The letter from the Bank of England governor was prompted by inflation hitting 3.3%. For starters, inflation isn’t actually 3.3% in this country. That’s how much the Consumer Price Index (CPI) rose annually up to the end of May. And the CPI is a very flawed measure.

Compare its 3.3% with some other figures quoted in King’s letter. UK food prices rose 8%. Household energy bills were up 10%. And fuel prices were a massive 20% up.

King expects CPI to eventually fall back. But not until next year — and it’ll go higher first.

Now, there are two important points to make here. First, even if the rate of inflation falls, that doesn’t change the fact that living costs will still be much higher as a result of the inflation we’re seeing now.

Second, King himself states that the rising costs of food and energy were, "until recently", unanticipated. So who’s to say other unanticipated events won’t conspire to wreck his prognosis?

Indeed, I can think of some anticipated ones that might.

Back in April, under the headline ‘Summer of Discontent’, I wrote the following:

So while we’re all feeling the pinch, those who feel most secure in their jobs, and who have union representation, are in a position to do something about it. And most of those work in the public sector.

A lot will depend this summer on how much the Government stands its ground. Unfortunately the Government we have is led by Gordon Brown.

Unison, the public sector union, has said it wants to reopen negotiations on pay deals — some of which were agreed only two weeks ago — in light of yesterday’s inflation news.

Both King and Darling are at pains to avoid a 1970s-style wage-price spiral. Sadly, I think that’s exactly what we’ll get.

Last night the Shell tanker drivers’ dispute came to an end. Drivers agreed to go back to work after securing a 14% — yes, FOURTEEN PERCENT! — pay increase. This shows other unions what can be achieved if they go on strike.

In the case of the tanker drivers, their union, Unite, pointed to the huge profits Shell was making from the record oil price. That was, if you like, their ‘excuse’ for going on strike.

As time goes on, I reckon the rising cost of living itself will provide excuse enough to down tools.

Of course, not everyone will respond to higher inflation by saying: "Right, now I want a pay rise! Give me more money!"

Many of us — especially those of us who work in the private sector — will simply suffer in silence.

But unionised labour won’t. Like anyone else who has a job, union leaders are judged on what they do — and do not — do. And what good is a union leader who doesn’t secure you a pay rise when your cost of living goes up?

The sole raison d’être of unions is to lobby for their members. Imagine a trade unionist standing up at a meeting and saying: "Listen, lads, I know some of you are struggling to pay your mortgage. But if we ask for more money, we’ll end up fuelling a wage-price spiral, just like Mervyn King and Alistair Darling have warned us about."

He’d be out on his ear in ten seconds! Replaced by the bloke who shouts: "Rubbish! We need a man of action! I’ll get you a pay deal — follow me to the picket line!"

There’s a lot more inflation yet to work through the system. Take your household energy bill. The rising wholesale cost of gas is squeezing retailers like Centrica. To maintain their margins, they reckon they’ll have to raise prices by up to 40% this year.

Every price rise will put more pressure on unions to protect their members’ interests. While at the same time arming them with the weapons to do so.

Higher inflation is a gift to the unions. It gives them an excuse to do what they do best — cause a lot of trouble. And now that the public sector is involved, the fireworks will really start.

It’s yet one more reason why you, as an investor, need to avoid investments that rely on a strong British economy. Rising food and energy costs are about to set off a wave of industrial action, which will further weaken UK plc.

But you can, in fact, benefit from these trends. Below, Garry White reveals how one coal investment not only offers you a way to profit from the energy crunch — but from the ongoing food crunch as well.

Forget the floods in America. There’s an even better reason to buy coal!

"The corn price wasn’t the only thing that shot up as a result of the floods in America," Garry White told us at this morning’s meeting. "The coal price did too. My coal investment’s hit an all-time high!"

America’s mid west has had major floods. A lot of mines have been flooded — and, unsurprisingly, this has boosted the price of coal.

As Garry points out, this is a temporary phenomenon. But there are other, long-term reasons why coal is a must for your portfolio.

First, it’s a proven way to generate electricity while the world waits for nuclear to fill the gap. That’s why it offers you a great way to play the energy crunch.

But investors can also benefit from the soaring cost of food. Because, as Garry explains, scientists have discovered a way to produce fertilizer from coal.

Turning coal into food? Sounds like science-fiction — but Garry assures me it’s not.

Find out why this one investment offers you the chance to profit from the two big trends that dominate the world economy right now — food and energy.

Believe it or not, you can make profits from the airline industry

Hard to believe, isn’t it? With oil still well above $130 this morning — and jet fuel costs even higher — airlines continue to get clobbered.

But our emerging markets specialist Manraaj Singh has spotted a way you can turn the airlines’ pain into your portfolio’s gain.

You see, with fuel costs soaring, the scramble is on to find more fuel-efficient engines. And to make such engines, manufacturers need a rare kind of metal only found in certain parts of the world.

Manraaj has uncovered one mining company that’s got its hands on huge quantities of this valuable rare metal — and now he wants to share the details with you!

Until tomorrow

Ben Traynor

Today’s Daily Reckoning — Inflation. Why it spells the end of life as we knew it

What goes around, comes around...

Every country in the world has had to put up with finger wagging and scolding from US officials. The US economy was the world’s best for so many years — and American experts, government officials, professors, and consultants never got tired of saying so.

But now...as the Rolling Stones put it... "the table’s turning...her turn to cry." Now, the tears are coming from the US; the foreigners are doing the scolding.

Bloomberg reports that US housing starts are at their lowest level in 17 years. Housing prices are going down too, while consumer prices go up — both apparently at a faster and faster rate.

You can read today’s Daily Reckoning in full HERE.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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