Markets fret as consumers and investors lose faith in central banks keeping a lid on inflation
The price of natural gas is soaring – and both equity and bond markets are again fretting about surging inflation.
The cost of wholesale gas for next-day delivery in the UK today hit an all-time high of £3.55 per therm (one therm is equal to 100 cubic feet of natural gas), a rise of 27%, meaning the price has doubled in a week.
The immediate upshot is that more “challenger” household energy suppliers, who tend to buy their gas on the spot market rather than in advance, are likely to topple over.
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This is not just an issue in the UK.
Natural gas prices are rising across Europe due to a combination of liquefied natural gas cargoes being diverted to Asia to meet growing demand there, lower supplies from Russia and lower output from renewable energy sources such as wind and solar.
The United States is also seeing a surge in natural gas prices.
Stock markets have suffered several bouts of unease this year amid signs that inflation is taking off.
There was a notable sell-off early in May reflecting a rise in the price of commodities such as copper and the cost of shipping, exacerbated in March by the stranding in the Suez Canal of Ever Given, a container ship en route from China.
On that occasion, markets took at face value the insistence of central bankers such as Jay Powell at the US Federal Reserve, Christine Lagarde at the European Central Bank and Andrew Bailey at the Bank of England that the inflation starting to appear was simply “transitory”, a reflection of surging demand as economies re-opened after the pandemic.
The standing of the Ever Given in the Suez Canal exacerbated factors behind a sell-off earlier this year
Investors around the world are now taking the threat more seriously.
For example, in Japan, the world’s fourth largest energy importer, the Nikkei 225 has fallen in each of the last eight sessions, taking it into correction territory.
Similarly, the Dax in Germany is down to a level last seen in May, while the Nasdaq – which is full of tech stocks which tend to move in close correlation to expected movements in interest rates – fell this week to a level last seen in June.
The anxiety about inflation is playing out most markedly in the sovereign debt markets.
The yield on 10-year UK government gilts (the yield on a bond rises as the price falls) has surged from 0.621% at the start of September to 1.15% – a level not seen since May 2019 – today.
In the same period, the yield on 10-year US Treasuries has risen from 1.307% to 1.552%, while yields on Treasuries of other durations have also risen.
Several things have changed since May.
The first and most obvious is that the price of crude oil has continued to grind higher.
The Nasdaq has fallen to levels last seen in June
In May, during the last inflation-inspired stock market squalls, a barrel of Brent Crude traded at between $64-$70 a barrel.
This month, so far, it has traded in a range between $77-83 a barrel.
The main US oil contract, West Texas Intermediate, has seen an even sharper move higher and is now trading at a level last seen in November 2014.
That is starting to feed into inflation expectations – something central bankers everywhere watch warily because it usually tends to feed into higher wage demands.
For example, two weeks ago, the latest survey of inflation expectations carried out by the investment bank Citi and the pollsters YouGov found that the British public is expecting inflation to hit 4.1% over the next year.
It is a similar picture elsewhere.
The latest survey from the University of Michigan, which is closely watched by US policymakers, this week pointed to rising inflation expectations among American consumers.
And a market measurement of inflation expectations among consumers in the eurozone – a part of the world that during the last decade has had to worry more about deflation, or falling prices, than inflation – this week hit its highest level for six years.
The price of crude oil has continued to grind higher
In other words, consumers and investors in the US, the UK and the eurozone appear to be losing faith in the ability of their central banks to keep a lid on the cost of living.
That belief is entirely rational if, for example, you are a British motorist who has spent hours during the last couple of weeks trying to find petrol or, for example, you are an American consumer looking at big increases in the price of your weekly grocery shop.
What is particularly interesting is that a number of so-called “trimmed mean” inflation measures, which strip out the more extreme price changes of items in the inflationary “basket”, suggest the headline rate of inflation in the US is being artificially depressed by big drops in items such as air fares and hotel rooms.
They imply that underlying inflation – that element of inflation that cannot simply be explained away by pandemic-influenced levels of supply and demand – is actually much higher.
The third factor is that some investors are now starting to think seriously about “stagflation” – the ghastly combination of stagnant growth and inflation last seen in the 1970s.
Google searches for the term “stagflation” have in the last week hit their highest level since July 2008, when the global financial crisis was getting under way.
Now, there are several good reasons to argue that we are not in for a re-run of the 1970s, not least the fact that the world is less dependent on oil than it was then and the fact that the trades unions – in Britain at least – are not as powerful as they were then.
But such searches do point to a change of sentiment among not only investors but the wider public.
British motorists have spent hours stuck in petrol queues
There is every reason to think that inflation may well rise in coming weeks and months.
A clutch of UK companies, including the car and aerospace parts supplier Melrose, the bakery chain Greggs, the furniture and floorcoverings retailer ScS and the online fashion retailer Boohoo have all in the last week highlighted labour shortages, supply chain issues and rising input costs.
And that is likely to feed into higher bills for consumers.
Petrol prices are already at their highest level for eight years.
The increase in the energy price cap this week will result in higher household energy bills for 15 million UK households.
And recent rises in the price of a number of agricultural commodities in recent weeks mean that food price increases are looming.
Further eating away at the ability of consumers to spend will be next year’s increases in national insurance.
In London, meanwhile, nearly 350,000 households and businesses are about to fall foul of Mayor Sadiq Khan’s extension of his ultra low emissions zone, obliging them to either replace their vehicle at vast expense or pay a £12.50 daily fine – again carrying the same effect as inflation.
In short, there are a lot of reasons why consumers and businesses alike have good reason to believe that current levels of inflation are not just transitory, but more deep-seated.
The Bank of England – along with its counterparts around the world – has its work cut out to persuade them otherwise.
Post Office campaigner Sir Alan Bates is yet to receive a reply from Sir Keir Starmer, despite writing to him over a month ago.
Sir Alan said he had written to the prime minister to remind him the “clock is still ticking” on a financial redress deadline for victims.
In his letter, he demanded a March 2025 deadline for compensation for sub-postmaster victims of the Horizon scandal.
Sir Alan confirmed to Sky News he was yet to hear back from the prime minister.
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“It was over a month ago,” he said.
“I sent him a reminder yesterday. I told him the clock is still ticking and it’s now five months from the March deadline, which I’m told is still achievable by other professionals.
“So let’s get on with it, that’s all we want. Get on with it.”
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A £15bn merger between two of the UK’s biggest mobile networks could get the green light – if they stick to their commitments to invest in the country’s infrastructure, the competition watchdog has said.
The Competition and Markets Authority (CMA) said the merger of Vodafone and Three had “the potential to be pro-competitive for the UK mobile sector”.
Announced last year, the proposed £15bn merger would bring 27 million customers together under a single provider.
The watchdog previously warned that tens of millions of mobile phone users could end up paying more if the merger went ahead.
However, the two groups recently set out plans to protect consumer pricing and boost network investment.
The CMA has now laid out a list of “remedies” required for the deal to go-ahead.
They include the networks committing to freezing certain tariffs and data plans for at least three years to protect customers from short-term price rises in the early years of the network plan.
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Stuart McIntosh, chair of the inquiry group leading the investigation, said on Tuesday: “We believe this deal has the potential to be pro-competitive for the UK mobile sector if our concerns are addressed.
“Our provisional view is that binding commitments combined with short-term protections for consumers and wholesale providers would address our concerns while preserving the benefits of this merger.
“A legally binding network commitment would boost competition in the longer term and the additional measures would protect consumers and wholesale customers while the network upgrades are being rolled out.”
Today’s announcement is provisional, with a final decision due before 7 December. The inquiry group is inviting feedback on today’s announcement by 5pm on 12 November.
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The CMA also published a list of potential solutions – which it called remedies – to issues it identified with the merger.
If the networks want the merger to go ahead, the watchdog requires Vodafone and Three to:
• Deliver a joint network plan to set out network upgrades and improvements over eight years;
• Commit to keeping certain existing tariff costs and data plans for at least three years to protect customers from price hikes;
• Commit to pre-agreed prices and contract terms so Mobile Virtual Network Operators (MVNOs) – mobile providers that do not own the networks they operate on – can obtain competitive wholesale deals.
Vodafone and Three are two of the biggest mobile firms in the UK, and their networks support a number of MVNOs including Asda Mobile, Lebara, Voxi, and Smarty.
Responding to the watchdog’s announcement, a spokesperson for Vodafone on behalf of the merger said: “The merger will be a catalyst for positive change.
“It will bring significant benefits to businesses and consumers throughout the UK, and it will bring advanced 5G to every school and hospital across the country.
“The merger is also closely aligned with the government’s mission to drive growth and to encourage more private investment in the UK.”
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Earlier this year, Three’s chief executive hit out at the UK’s “abysmal” 5G speeds and availability as he urged regulators to approve the company’s merger with Vodafone.
Robert Finnegan noted his firm’s “cash flows have been negative since 2020 and our costs have almost doubled in five years, meaning investment in [the] network is unsustainable”.
“UK mobile networks rank an abysmal 22nd out of 25 in Europe on 5G speeds and availability, with the dysfunctional structure of the market denying us the ability to invest sustainably to fix this situation,” he added.
Business leaders expressed frustration with ministers on Monday amid a growing budget backlash that bosses said would trigger an “avalanche of costs” and leave them with no choice but to slash investment and increase prices.
Sky News has learnt that bosses of large retail and hospitality companies and trade associations told Jonathan Reynolds, the business secretary, that last week’s budget risked damaging consumer confidence and exacerbating challenges facing the UK economy.
Among the dozens of companies represented on the call are said to have been Burger King UK, Fuller Smith & Turner, Greene King, Kingfisher and the supermarket chain Morrisons.
Mr Reynolds is said to have acknowledged that Rachel Reeves‘s inaugural fiscal statement had “asked a lot” of British business, with James Murray, the financial secretary to the Treasury, understood to have described it as “a once-in-a-generation budget”, according to several people briefed on the call.
Jonathan Reynolds. Pic: PA
One insider said that Nick Mackenzie, the chief executive of Greene King, had highlighted that the increase in employers’ national insurance (NI) contributions would cause “a £20m shock” to the company, while Fullers is understood to have warned that it would be forced to halve annual investment from £60m to £30m as a result of increased cost pressures.
Rami Baitieh, the Morrisons chief executive, told Mr Reynolds that the budget had exacerbated “an avalanche of costs” for businesses next year, and asked what the government could do to mitigate them.
Sources added that the CBI, the employers’ group, said its impact would be “severe”, while the British Beer & Pub Association added that there was now a disincentive to invest and flagged “a tsunami” of higher costs.
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How will the budget affect businesses?
The range of comments on the call with ministers underlines the scale of discontent in the private sector about Labour’s first budget for nearly 15 years.
Only a small number of interventions during the discussion are said to have been in support of measures announced last week, with the Federation of Small Businesses understood to have praised the doubling of the employment allowance, which would see many of the smallest employers having their NI bills cut by £2,000.
The Department for Business and Trade has been contacted for comment, while none of the companies contacted by Sky News would comment.
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