Comment: Inflation falls | Housebuilders rise

Martin Flanagan
Martin Flanagan
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RECENT weak average earnings growth had already given Bank of England governor Mark Carney and the rest of the monetary policy committee (MPC) the leeway to avoid raising interest rates later this year.

The latest benign inflation data reinforces that latitude to sit on their hands, and not risk hurting the economic recovery, in spades.

Consumer prices rose just 1.6 per cent in July, down from 1.9 per cent in June. Average wages growth is the Bank’s new bestest friend as far as a reference point for the timing of a rate rise is concerned.

But, with pay growth limping along at just 0.6 per cent in the three months to June, the momentum for a hike later in 2014 is fading before our eyes. Inflation has now been below the central bank’s 2 per cent mid-term target for seven months. The latest figure, well below already benign market expectations, makes speculation that we might see a monetary tightening in November appear fanciful.

As a result, it was little wonder that, after the data, sterling took another battering on the foreign exchange markets yesterday and that gilts rose.

The pendulum of speculation has swung clearly back to February, at the earliest, for the first rate rise. Even though the July inflation figure benefited as usual from a fall in clothing and footwear sales, it looks like we are seeing a trend here rather than a positive blip.

Separate data yesterday showed that producer price inflation – what manufacturers pay for their raw materials and energy – also fell at the fastest since September 2009, while recent house price numbers lost a bit of their steam.

Taken together, the low inflation backdrop shows Carney shouldn’t have any difficulty in his forecast that when bank rates rise the movements will be gradual and limited.

Housebuilders move to the front foot

FOLLOWING the 166 per cent surge in half-year profits at Bovis Homes on Monday, came a near-60 per cent jump in earnings at rival housebuilder Persimmon yesterday.

As this looks set to be replicated in much of a far healthier sector than was the case a few years back, housebuilders should be able to view a recent cooling of the market with equanimity.

There is no great secret behind the industry’s recovery. In the bad times after the financial crash the leading companies reined in their aspirations, repairing their balance sheets and profit margins through consciously reducing volumes and divesting non-core assets.

But, moving on from that batten-down-the hatches strategy, the likes of Persimmon and Bovis are now riding the wave of greater consumer confidence, on job security if not quite rising wages yet.

Government initiatives to stimulate the market have also helped, even if the Bank of England has recently dampened some activity by insisting on more rigorous financial scrutiny by mortgage lenders.

Even with that caveat, housebuilders have much to feel positive about in the current climate.