Inflation Hits 4.4% - This Is Why I Tell Investors: "Avoid Britain!"

The news this morning is all about inflation. Consumer Price Index inflation is at 4.4% — more than double the Bank of England’s target.

Compare that to the latest wage data, released this morning at 9.30am. Average earnings (including bonuses) rose by 3.4% in the year to June. The price of what we buy is outstripping our ability to pay it by a full percentage point.

I’m not a big fan of Metro "newspaper", but I think their headline sums it up — ‘We are worse off’.

But... you knew there’d be a ‘but’, didn’t you? Dig a little deeper, and there is some good news to be found.

Well, at least it seems like good news at first blush. In actual fact, it confirms why I’m telling investors to avoid letting their portfolios be dragged down by Britain’s economy. My stance on that hasn’t changed. I’ll explain why, and what I am recommending, in just a second. First, let’s dig into the numbers. Specifically, let’s look at the figures for output and input price inflation.

Output prices first. Year-on-year, output price inflation rose to 10.2% in July. No change in trend there. Factory gate inflation, as its known, is still on the rise. This is a clear sign that more consumer price inflation is in the pipeline.

But look at input prices — the cost of the raw materials used to make the outputs. Annual input price inflation fell from 30.8% in June to 30.1% in July.

Not an earth-shattering drop, I grant you. But it is a sign that inflation may soon top out. The run up in prices has been fuelled not by rising demand here but by the bull market in commodities. As raw materials became more expensive, it pushed up input prices, output prices and, at the end of the chain, consumer prices.

Higher prices are still working their way through. But what we know from the global commodities market — and not from the input price data — is that a breather is on the way.

Good news... or so you might have thought. There are two important points I want to make here.

The first is that while the inflation rate will fall back, the actual price level will remain high. Since I don’t expect wages to suddenly shoot up, living standards will not only fall — they’ll stay fallen.

And why don’t I expect wage growth to recover? Well, that brings me to the second point I want to make.

I had a chat with our commodities watcher Garry White this morning (more from him below). He agreed with my thinking on why commodities prices have slipped. It’s not just speculators cashing out — there are fundamental concerns about real global demand.

The fear — which Bill Bonner expresses in today’s Daily Reckoning, below — is that the whole world economy is heading for a slump. Those fears have hit commodities prices. This should put a limit on how high the rate of inflation gets.

But, sadly, this is scant consolation. Because Britain is right at the heart of the global slowdown. It’s the nature of things in today’s economic climate that this silver lining comes with an even bigger cloud attached. Britain’s economic ills make it a bad place to do business. As a rule of thumb, if a company gets all its earnings from UK consumers and businesses, you should stay away.

UK consumers and businesses have less money than they had. And what they do have they’re scared to spend.

So what should you do? Well, we advise seeking out companies with established foreign earnings streams. Because while Britain is struggling, there are other economies that are still growing well.

That’s obviously what Tesco is thinking. Today we read the supermarket is finally making its long-awaited move into India. It launched Fresh & Easy in the US last year, now it’s going after another huge market. Makes sense to me — now is not the time to have all your eggs in the UK basket.

But while Tesco is still getting its emerging markets pieces in play, we’ve found three companies that have already established their presence. They’re British companies, but — crucially — they have good exposure overseas.

Find out more about why we think these three stocks look well placed to weather the UK storm.

A giant "hoover" that sucks money out of the sea?

"Garry, what are you talking about?"

I thought our commodities expert had lost his marbles yesterday. He was telling me an excited tale about the North Pole... melting ice caps... resource wars... and a giant "hoover" with the ability to suck profits from beneath the sea bed.

But fears for his sanity aside, Garry could be onto something here.

One year ago, Russia planted its flag on the sea bed right beneath the North Pole. Why did it bother? Simple! Resources...

Read on to discover what Garry believes is the best way to play the scramble for undersea commodities...

Until tomorrow

Ben Traynor

Editor

Today’s selected articles:

Garry White shows us how the so-called Northern Powers will soon be mining the Arctic Sea.

Theo Casey on investing in a recession — why one business looks set to boom as others fail.

The Daily Reckoning — What if the whole world has a Japan-style slump?

Yesterday, we posed a ‘what if...’ It was not a prediction; just an exploration: what if the world economy goes into a long, slow, soft Japan-like slump?

What if stocks continue to go nowhere? Yesterday, the Dow lost 139 points, after several big gains in the last few sessions. Up. Down. Up. Down. Stocks are down 15% - 20% all over the world (except for Shanghai’s big 50% loss) for the year. Over the last ten years, markets in the East and emerging economies are still up — many of them by huge margins. But the US and other developing markets are mostly flat. Adjusted for inflation, investors have lost 20% to 40% of their money.

You can read the Daily Reckoning in full here P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

^ Back to top

BlinkList
Del.icio.us
Digg
Facebook
Google Bookmarks
Livejournal
Newsvine
Reddit
StumbleUpon
Yahoo! My Web

Inflation Hits 4.4% - This Is Why I Tell Investors: "Avoid Britain!"

RELATED ARTICLES

FLEET STREET LETTER

ZURICH CLUB

This Is Why I Tell Investors: "Avoid Britain!"