Gold News

The mixed-up market for money

Free market prices are set by demand and supply – or so says the theory. More demand, prices rise. Less demand, prices fall. Simple...

The process is supposed to work in reverse, too. Higher prices discourage demand. Falling prices increase demand. Simple again! The worldwide bubble in "Low prices, every day" at Aldi, Wal-Mart, Carrefour and every other pile 'em high outlet is proof of that.

But what's this? Tesco said yesterday that its UK stores raised their average prices by 0.8% in the three months to December. Yet Britain's No.1 grocery store still grew like-for-like sales by 5.6% during the period, excluding petrol.

Perhaps British shoppers have forgotten how the economy is supposed to work. Don't they know that rising prices – plus growing demand – could mean higher interest rates when the Bank of England vote on the cost of Pounds Sterling tomorrow?

House-price inflation in the UK is now back at 2004 levels...and new mortgage debt is growing faster than any time since March 2005. In other words, the Old Ladies voting on UK interest rates can't ignore the "upside risks" to inflation.

The British government has ordered Mervyn King and his team to target 2.0% on the CPI measure of inflation. Whether the CPI is straight and true...or beaten and bruised, as everyone thinks...won't matter either way on Threadneedle Street today. The Bank of England's inflation target has been reached and breached since April this year. Annual inflation has now reached 2.4%. Simple economics says base rates should rise to cut demand for new loans, or spending will keep growing too fast.

"The headline CIPS/RBS Business Activity Index rose for the third consecutive month in November to post 59.8 from 59.3," reports Reuters today. "At that level, the index was indicative of the strongest growth of activity for almost three years. Growth of activity remained particularly strong among Business Services firms."

The BBC explains: "If economic growth runs too fast it can lead to a shortage of production capacity - pushing wages and prices up. This tends to increase inflation, something that central bankers use higher interest rates to keep in check."

Trouble is, not all parts of the UK economy are growing today. Consumer spending and debt, yes. But manufacturing output fell 0.4% in November, said the Office for National Statistics this morning. The City had been expecting growth of 0.2% instead. Industrial production alone sank 0.8% from October – its fastest monthly drop since August last year.

"[The data] was a lot weaker than expected," says one European economist, "it is very disappointing...There is concern that the manufacturing sector is the weakest for the UK economy."

So which way will the wonks jump when they vote at the Bank of England tomorrow morning? Rates up, manufacturing suffers. Rates down – or on hold at 5.0% - and the cheap money bubble will inflate yet again.

It's simple supply and demand in the mixed-up market for money.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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