Inflation is not the enemy

MAY consumer price inflation at 2.9pc is a bit of a shocker and reflects the impact of a depreciated pound on import prices. But we shouldn’t forget that not so long ago the big debate in Britain was about the dangers of deflation. Hitting the Bank of England’s 2pc target on the nose in an age of flexible exchange rates and volatile energy prices is difficult.

There will be a rush to argue that household incomes are being squeezed and this will have a damaging impact on growth projections. But it is worth noting that some of the items driving prices at present, such as video games, are not for every household in Britain. Producer prices have started to edge down and the squeeze might not be as severe as imagined.

We have to wait on latest wages data, but at present prices are running ahead of the 2.4pc rise in earnings and retail sales are slowing. It is worth noting, however, that when UK unemployment stands at 4.6pc of the workforce, and people feel secure in their jobs, they are unlikely to lose the spending habit.

Moreover, as there are 400,000 more peo- ple in jobs than a year ago – that means overall spending power is increasing.

The ‘wealth effect’, the result of rising asset prices, should also encourage many citizens to keep spending. A bit of inflation can also be good for savings in equities (if not cash). It can also be helpful for commerce in that it encourages consumers and businesses to buy now, rather than later, when prices might be higher.

Even though prices are currently above the Bank of England’s 2pc target, most members of the rate setting Monetary Policy Committee are not yet champing at the bit for a higher bank rate. If there is a concern on the horizon, it is the muddled election outcome. Chancellor Philip Hammond’s efforts to reduce the deficit and balance the budget are weakened. A combination of easy monetary policy and loose fiscal policy can only be tolerated for so long. But it may be just the thing to keep the economy moving until the terms of Brexit are in the bag.

Clearing myths

ANOTHER scare story about the City after Brexit bites the dust. The prospect that tens of thousands of jobs in the clearing of euro denominated securities are heading to the Continent is fantasy.

Yes, Europe’s regulator does want a great say in policing euro-denominated clearing if it decides the trades done are of ‘systemic importance’. This is interpreted by some as evidence that UK regulators will be subservient to EU rules outside the single market.

The reality is that most of the regulations governing clearing were developed in London since that is where most clearing is done. And the very idea that currency denominated derivatives trades should only be done in the countries where they originate is a fairy tale. LCH.Clearnet, part of the London Stock Exchange, dominates this market because London has the liquidity, and nations as far apart as Canada and Japan have chosen to do their currency denominated clearing in London.

The greater the volume of transactions, the more efficient the markets and the cheaper the costs to investment banks which are the dominant players.

There is another important fact. As a global financial centre, the City (and by implication the UK authorities) in effect takes on the capital risk of trading in a country where the banking sector is four times the size of GDP. The Frankfurt-based European Central Bank is hidebound by scepticism over Anglo-Saxon capitalism and held back by conservatism and the need for decisions to revert to the German Constitutional Court. Paris likes the idea of a slug of the business and might hope that President Emmanuel Macron, a former investment banker, would jump at the chance. But his priorities are reforming labour laws and deregulating businesses. Euro clearing is hardly likely to unleash the animal spirits.

Digital loser

COMPETING with the Silicon Valley behemoths is a commercial nightmare. Londonbased fintech firm Monitise was a trailblazer for mobile phone payments, and for a shorttime a multi-billion pound firm.

As Apple and Google moved into the same space, Monitise shares tanked and it has surrendered ownership to US competitor Fiserv for a measly £70m. Where are America’s ‘trustbusters’ when you need them?