Rising inflation to clobber profits, jobs

Yet another 'surprising' surge in inflation to 3.8% on the CPI (Completely Pointless Index). As usual the inflation is coming mostly from imported goods, particularly oil and food. Firms will try to pass on these increases to consumers, but will mostly fail because real wages are falling and consumer credit is drying up.

Instead they will mostly have to take the hit in their profit margins (which have been at all time highs over the past few years) as consumers cut back and find alternatives.

This means lower investment and higher unemployment, exacerbating the forthcoming recession. This is already happening. Confidence in the service industries has plummeted to an all-time low (see chart). Meanwhile, unemployment has jumped at its fastest rate for 15 years.

In an economy where growth is entirely reliant on the service sector this spells disaster. Anyone suggesting a rate increase at this stage might possibly help matters is barking.

Icebergs don't give you soft landings

With the good ship housing market having apparently hit an iceberg, there are nonetheless still people out there who still think that a 'soft landing' might be possible.

By 'soft landing' they mean some period of stagnation of house prices, presumably followed by the resumption of crazy levels of inflation like we've seen over the past 10 years.

This is pie in the sky. It's of the very nature of these things that there can be no soft landing, that house prices will fall, reposessions will soar, and unemployment will increase, before things eventually bottom out in a few years' time.

Why?

In short, because it's an inherently unstable market, where investors expectations of price changes become self-fulfiliing. Sellers who expect price falls will try and sell as soon as possible, but they will find that buyers are waiting for those price falls to materialise. And if sellers refuse to drop prices, they will simply pull the rug out from underneath the sellers of the house they were going to buy. And so on.

The very factors that led to the boom in the first place are going into reverse and there's little that anyone can do to stop it. Where before we had irrational exuberance, we will now have a period of mounting fear and panic, before reality eventually sets in again.

To summarise, we have: rising borrowing costs, less mortgage availability, weak income growth, and increasing expectations of price falls. That's a crash in the making.

Interestingly Spreadfair now projects that house prices will fall by 7-8% (in nominal terms) by end 2008. I'd probably sell that if I wanted to hedge against falls. But not owning any property, I'm hedged up to my eyeballs anyway.

Don't pay any attention to this idiot

News reaches us that "Sir" John Gieve, member of the Monetary Policy Committee, voted for an immediate rate cut at the last meeting of the Bank of England.

Woody would like to remind people that Gieve has a track record as an irresponsible idiot. He was Permanent Secretary at the Home Office when Blunkett tried to fast-track his nanny's visa but conveniently 'couldn't remember' how it happened. That earned him a knighthood.

He was still Perm Sec when the Home Office was accused of colossal financial mismanagement. He was also personally involved in the (now forgotten) release of a thousand foreign prisoners who should have been deported.

Needless to say this qualified him for a plum job on the MPC, particularly as at the time GB really needed to get rid of Andrew Large who was far too hawkish for his liking.

He's an idiot and a stooge, probably under direct orders from the Clown himself to reignite the economy.

So if Gieve voted for it it's almost certainly the wrong thing to do. Fortunately it seems likely that other factors will prevent rates from coming down anyway.

1. Sterling is relatively overvalued, making it much harder to cut rates without immediately importing inflation. (This is not the case with the dollar.)

2. Commodity inflation has been soaring and will continue to do so while the yuan is so under-valued.

3. King doesn't want to be seen to make the same mistake as in 2005 when an injudicious rate cut prompted the property market to take off again. Unlike Gieve, King is no idiot.

So rates will probably stay on hold until well into the New Year at least.

NB Woody is quite happy to be debt-free and renting for the time being.