Comments: Firms flex their muscles to push up prices

So do you think we are heading for Stagflation then? And what of your prediction that Oil will again go to $40 a barrel? Do you still stand by that? Or have you changed your mind? Saudi production is down 8% a year(voluntary?), mexican production is crashing and the North Sea is well past peak. Not looking good is it?

Posted by Alex A at April 2, 2007 09:12 PM

No. We are a million miles away from stagflation. The world economy is strong and the UK economy is strong and firms are taking advantage of that strength to try to push up prices. They may succeed a little, but for the reasons I outline, they will also face resistance.

As for oil, it dropped below $50 a barrel briefly earlier this year, and has been buoyed, not just by the strength of the global economy but by some unusual discipline from OPEC and by geopolitical tensions, most recently over Iran. We are still in the spike. How long that spike lasts depends on a number of factors including whether the global economy continues to grow at a 5% pace, as it has done over the past three and a bit years. History would suggest that it should slow to something more normal, and perhaps slower growth in the US will help bring that about. But the global economy still has plenty of momentum. Oil spikes last for varying lengths of time. THe longest in recent times was in the first half of the 1980s -- 1978-9 though to 1984-5.

Posted by David Smith at April 3, 2007 10:34 AM

A lot of M&A activity has taken place where the target market ie UK has been attractive.

As far as firms financial statements are concerned interest expense has taken root and firms are positioning for a steep rise in interest rates.Finance costs will feature prominently in every P&L account and smart companies will create a provision now for something they perceive is imminent.

No more will gross margins feature except where there is an exchange loss; but I feel finance costs will rise tremendously (already in the region of 7% per annum) and so far everything is colored "micro" with no macroeconomic effect until an equilibrium is obtained between hikes in interest rates and the relative strength of the GBP.

Posted by Hitesh Damani at April 3, 2007 10:37 AM

I cannot vouch for conditions in the shed industry, but take a look at the latest detailed PPI figures. Although these again surprised on the upside in February, the single biggest upward factor was again recovered secondary raw materials (up 10.7% on the month), reflecting rampant demand for scrap metal from China. This alone accounted for more than half the 0.5% February increase in core output prices. However, this sub-sector represents just 0.632% of manufacturing. Thus, whilst there clearly is abundant evidence of pricing power in this tiny part of manufacturing, the same can most definitely not be said for the overwhelming majority of the sector. Indeed, for the remaining 99.368% of UK manufacturing, core producer output prices increased by less than 0.2% last month, with the headline measure rising by less than 0.1%. Talk of UK manufacturers (shed-builders aside) being able to raise prices in an attempt to expand margins looks a tad overblown.

Posted by John Clarke at April 10, 2007 12:08 PM
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