View from City Road: Inflation news brings bulls to the factory gate
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Your support makes all the difference.The good news on inflation just keeps on coming. Yesterday's producer price figures were again better than the markets expected. They confirm the picture from other data of subdued price pressures and therefore relieve any nagging doubts about whether the next move in interest rates might be upwards. Interest rates are still heading down.
They also show that the gap between manufacturers' input costs and the prices they are able to charge for their output is continuing to rise. That again confirms the impression from company results so far in the season: margins, earnings and dividends are generally coming in a little better than expected.
The figures are therefore encouraging for share prices on two grounds. If low interest rates persist, bank and building society savers are likely to continue to find unit trusts and shares attractive. And if dividends can rise respectably because of strong earnings growth, the shift from an equity market driven by liquidity to a market driven by earnings should be smooth.
So low inflation matters, and yesterday's figures suggest that there is more in the pipeline. The figures for producer prices are one of the better indicators of 'core' inflation rates in the economy, since they tell us quickly how manufacturers are responding to wage and raw material costs.
The rise in factory gate prices over the year to February was just 3.3 per cent, not that much over the 2.7 per cent trough achieved in the autumn of 1992 before the pound left the exchange rate mechanism. Despite the devaluation-induced rises since then, the annual rate is likely to dip below its previous trough in the next two months. It could even go below 2 per cent.
This is not, however, a product of artificial squeeze. With unit labour costs growing by less than 1 per cent over the year and raw material costs dropping by 3.6 per cent, there is room to rebuild profits. There is still a question mark over pay settlements and inflationary pressures in services, but these figures should encourage the bulls of both bonds and equities.
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