Comment: Flat inflation gives recovery a jolt

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WE ARE clinging by our fingernails to an inflationary environment. Annual inflation in January came in at 0.3 per cent, the lowest since records began in 1988, down from 0.5 per cent in December and well adrift of the Bank of England’s mid-term target of 2 per cent.

It is evidence to back Bank governor Mark Carney’s recent suggestion that we are likely to see a short period of negative inflation – rather than more pervasive and sustained deflation – around the time when the daffodils bloom.

Martin Flanagan

Martin Flanagan

The good news is that this climate should be conducive to both consumer spending and real wage growth in the coming months and keep the recovery on track.

This is no mean influence as the economic bounceback has been driven by consumer spending and debt rather than business investment and exports. That may be undesirable in the longer term, but in the shorter term economic cycle consumer wellbeing is the only game in town.

Less helpfully, the latest price data means any prospect of the UK’s starved savers getting even a modicum of decent interest on their money at a time of also historically low base rates recedes even farther.

In fact, Carney has said it is possible rates could even fall more if our current inflation-lite evolves into a darker deflationary environment.

As expected, falling fuel and food prices drove the Consumer Prices Index down farther last month, triggered by the slump in the cost of oil and the supermarket price wars.

Neither of these factors shows any imminent sign of abating. It is also fortuitously good timing for David Cameron and George Osborne as they stage-manage virtually every soundbite to press what they see as their main electoral campaign strategy, which, in a variation on Bill Clinton’s US campaign in the 1990s, could be summed up as: “It’s the long-term economic plan, stupid.”

Aldermore reignites float speculation

THE doubling of profits at Aldermore, and the solid 2014 trading figures from Santander UK recently, plus TSB’s successful public listing last year, are gradually edging the subject of banking flotations front and centre again.

Throw in Shawbrook, another challenger bank said to be setting its cap at the stock market, and it is looking more like a case of when, rather than if, these players launch initial public offerings (IPOs).

Aldermore shelved its planned float last October due to market volatility, but that has largely passed. Memories are still a bit fresh for toppy valuations to be achieved, maybe, but investor sentiment towards the challenger banks is benign.

That sentiment is also not actually damaged by the drip-drip of unsavoury public relations own goals that still beset the more established UK banking industry, with HSBC’s Swiss tumble off-piste only the latest.

Even so, it seems unlikely there will be a mad rush for the stock market doors. There is no IPO first-mover advantage. But the direction of travel is clear.

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