Bad news overnight from the UK and the US as both economies appear to be showing signs of sliding into recession.
In the US the consumer price index rose 0.2% in April, while the so-called core rate was up 0.1% compared to the forecast 0.2%. So Wall Street rose rejoicing that the inflation ogre had been tamed. Or so they thought.
Consumer inflation was less than expected because of two main factors: a drop in car prices as desperate dealers and manufacturers try very hard to cut overfull stockyards and holding paddocks; and a large, 1.5% drop in the cost of hotel rooms, as all but empty hotels and motels cut their rates because the high cost of petrol and rising air fare costs means Americans (especially American businesses) are not travelling as much.
The analysts glossed over the very nasty 0.9% rise in food costs, compared to March, the highest for 18 years in a single month! Energy costs were unchanged from March and are up 6.4% over the year.
And what was the annual rise to April in headline CPI? 3.9% compared to 4.0% in the year to March, while so-called core inflation was up 2.3% over the past year. As producer prices have risen by upwards of 9% over the past year, quite a few American manufacturers, service companies, retailers and others are taking a hit on margin as they try to contain their selling prices.
There is also, undeniably, the US housing slump which worsened in April as foreclosure filings hit a record 243,353 last month, or 1 in every 519 US households. According to RealtyTrac, the US company which tracks and sells foreclosed properties, that’s up 65% on April of last year, and 4% from March.
US economists say that the housing slump and rising foreclosure rate and number of unsold houses, is anti-inflationary: they help hold down a measure in the US CPI called “Owners equivalent rent”. That’s an estimate of what an individual would pay would pay if they were renting their home. It rose only 0.2% in April and is up 2.6% over the past year. This measure accounts for almost a quarter of the total consumer price index basket.
Meanwhile, across the Atlantic, the UK economy is having its own problems.
The UK banking sector, already reeling from Northern Rock, is facing fresh problems as former building society, Bradford and Bingley launched an emergency rights issue yesterday aimed at raising just over $600 million in new capital.
Mortgage lending is tanking to a 30 year low; house prices are tumbling at a growing rate, commercial property values are falling as well, retail sales had dropped two months in a row and wholesale price inflation is running at more than 7% a year and the CPI at 3%.
And the Bank of England warned yesterday that the “nice” decade was now behind the country and consumers and business were warned that two years of near recession lay ahead for the economy, with inflation stubbornly staying at or above 3% for months to come.
Bank of England Governor, Mervyn King had to deliver the grim economic news saying that the UK faces two years of economic misery, with recession a real possibility, rising unemployment, persistently high inflation, falling real incomes and a very nasty squeeze on living standards.
King said that fuel and food bills are rising, investment is falling, and with inflation still high, there’s little chance of a rate cut in the immediate future. He also said that oil and gas prices have doubled over the past year and food prices have risen 60%.
Prime Minister Gordon Brown is facing political fallout as his housing minister, Caroline Flint, was photographed arriving at a Cabinet meeting holding documents which showed that she had been told that British housing prices would drop further – another 5 to 10%.
On Tuesday morning her department released figures that showed that house prices dropped by only 0.1% during the first three months of the year, yet no mention was made of the concerns over future price falls. But the documents tell otherwise.