Angry shareholders

A number of example this week of potential shareholder power: HSBC is likely to face a significant protest vote againt its renumeration policy believing that the prosed payout is excessive and the performance criteria insufficiently stretching. Last week, almost half of Royal Dutch Shell's investors refused to approve its remuneration report because of concern about retention bonuses for three directors, while almost 40 per cent of shareholders in GlaxoSmithKline also abstained or voted against its report for the same reason. The internet company Yahoo has postponed its annual meeting as its board struggles to escape a shareholder uprising led by the billionaire corporate raider Carl Icahn. The potentially rowdy gathering in California was due to be held on July 3 but Yahoo has put it off to an unspecified date. Shareholders are unahappy with Yahoo's failure to agree to the takeover by Microsoft.

What is the 'real' rate of inflation?

A superb article by John Kay (Full article here) on the differences between the official rate of inflation, as measured by the CPI (currently 3%) and perceptions of inflation. 'There has always been scepticism about official measures of inflation, but the gap between popular perceptions and the government’s statistics has never been so wide.The popular newspapers have sent intrepid reporters down to the shops to discover the truth, by filling a typical shopping basket. The results are “alarming”, “the most savage increase in living costs for a generation”. The Daily Express found an 11½ per cent increase in prices, the Daily Mail put it at 15 per cent.Yet what the Office for National Statistics does is just what the Express and Mail did, except that the ONS does it much more carefully.

As he points out, the CPI is an average and as such 'disguises a range of experiences' and it is the 'most salient prices' that form our perceptions of inflation. 'The price of petrol is highly salient: not only do people buy petrol regularly, but even when they are not buying it, they routinely pass signs that display the price. We are most observant of the prices of goods we buy regularly and often and of the cost of undifferentiated products, such as petrol or milk, for which price comparisons are easier and likely to stick in our minds.' He points out that perception of inflation is not determined by the ONS but by experieince.

Huge rise in alcohol related admissions

The Guardian reported that the number of people admitted to hospital in England due to drinking alcohol has more than doubled in the past 12 years, NHS figures revealed today. In 2006-07, 207,800 people were admitted to hospital because of their drinking. This included people who were drunk, had liver cirrhosis or an alcohol-related illness such as heart disease, as well as those injured or assaulted while drunk. This is more than double the amount in 1995-96, when 93,459 people were admitted to hospital, and a 7% rise on the 193,637 admissions in 2005-06. Almost one in 10 (4,888) of those admitted to hospital last year were children under 18, the study, by the NHS Information Centre for health and social care, found.

This is a good example of negative externalties and the report highlights the strain that this increase on alcohol-related admissions is putting on the NHS.

What could be done to reduce the number of alcohol-related admissions to hospital? Would increased taxation reduce alcohol consumption? Should supermarkets be prevented form offering alcohol at discounted prices?

Energy supply industry is a 'comfortable oligopoly'

Britain's electricity and gas supply industry is a "comfortable oligopoly" that feels little need to innovate or compete, an industry watchdog told MPs yesterday. Allan Asher, chief executive of Energywatch, said that over the last decade the number of gas and electricity suppliers had fallen from 20 to six, while in some areas only two or three firms competed. "There is a myth that there is vigorous price competition between them [the suppliers]. For the main product they most actively sell - direct debit for dual fuel, gas and electricity - the price difference between the cheapest and most expensive is £30 a year; it's just a few pence a week."

An interesting example of price discrimination was highlighted in that the price that companies charged consumers using pre-payment meters, who are often among the poorest. In some cases, meant they paid far more than customers paying by direct debit. Pre-payment meters should be called "the poor-pay-more meters", he said. Guardian article here.

What features make an industry such as energy supply susceptible to oligopoly?
What could the Competition Commission suggest that would make it more competitive?

Aviation policy should be rethought

The government should completely rethink its aviation policy and shelve plans to expand Heathrow and Stansted airports, according to an influential advisory body.The Sustainable Development Commission, chaired by Sir Jonathon Porritt, said there were big question marks over the environmental and economic arguments underpinning the proposals for British airport expansion. It warned that the government faced a wave of legal challenges if it did not hold an independent review of its 2003 aviation white paper, which sanctioned new runways at Heathrow, Stansted and other airports. It believes that a full cost benefit study should be undertaken to consider the full implications of the expansion of air travel. Read further details.

A good example of an economic activity with many private benefits but also numerous external costs (ask those people who live near an airport - I am one of them!)

Fuel prices 'keep cars off road'

It is generally assumed that the demand for petrol is relatively price inelastic, hence the increasing duty that has been imposed over the years. But we may now have reached a price that is startring to encourage some motorists to reconsider their transport options if a report by the AA is to be believed. High prices of petrol and diesel are making UK drivers think twice about travelling by car, a survey suggests. The AA polled 17,500 members, and found 27% had cut back on other areas of spending, 16% had decided to travel less by car, and 21% had done both. Petrol prices have risen sharply this year, although government figures have only shown car traffic falling 2%. The Petrol Retailers Association says that average prices could go up as much as 5 pence a litre by the weekend. Link to BBC News.

Why do you think 27% had 'cut back on other areas of spending' to maintain their perol or diesel consumption?

Food price rises 'hit UK harder'

The UK is "more exposed" to rising food price rises than its peers, adding to recessionary fears, according to a report by Ernst & Young. Its Item Club says "the implications for business are profound" - making it more likely firms will raise prices. Unlike the US which has a balance of food and France which has a surplus, the UK has a trade deficit in food. The Item Club report says that as food prices keep rising, this reduces the chance of an interest rate cut in the UK. "The danger now is that rising food world prices and energy prices will lead to excessively tight monetary policy", it says, as the government seeks to counter the rise by "squeezing domestic costs". As food and energy prices contribute 1.7% to Consumer Prices Index Inflation - which recently reached 3% - this leaves "little room" for price rises elsewhere. Input costs have risen by nearly a quarter in the 12 months to April, eating into consumers' disposable incomes. Link to article.

The government's 2% inflation target will require a 1.5 percentage-point premium on interest rates because of spiralling food and energy prices. This will lead to sharply lower growth and rising unemployment, as many as 60,000 jobs lost, according to the Item club report, which uses the Treasury model to forecast the economy. It urged the chancellor, Alistair Darling, to exclude food and energy from the inflation target or risk excessive pain for voters in the run-up to the election. Read the Guardian article.

Larry Elliott in The Guardian

In his article 'Farewell prudence, hello £2.7bn slush fund', Larry Elliot reflects on Labour's efforts to deal with the criticism of the abolotion of the 10p tax band and the political uproar it has caused. It is a solution that is too late...' The trouble is that it has taken 14 months to find this solution and it came only after the government first insisted there was no problem and then said the poor state of public finances meant only a far less generous package was affordable.' Does it stand as a credible economic policy?

The £2.7bn can now be seen as a 'political' move designed to influence the Crewe and Natwich byelection. He compares it to the last time tax giveways were used to try try to gain electoral advantage, Norman Lamont in 1992. He suggests the government's reasons for the change, quoting Alistair Darling "As I made clear at the time of the budget, it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows. Debt is lower than in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation."

Elliot thinks this is unconvincing, outlining the the two views on fiscal policy: 'One is Keynesian: the idea that when times are tough, governments should do more than simply allow borrowing to rise as a result of falling tax revenues and rising welfare payments; instead they should raise spending or cut taxes to boost activity. The other is called Ricardian equivalence: attempts by governments to borrow their way out of trouble are doomed to failure because individuals know that there is no such thing as a free lunch, with today's tax cut turning into tomorrow's tax increase. As a result, they don't spend the windfall from the state, but save it for the day when they have to pay it back.' The recent $150bn worth of tax rebates in the USA was designed to reinforce the effects of lower interest rates whereas the £120 per taxpayer will have significantly less effect. Read the full article here.

Inflation ...all the fault of the MPC?

According to an article in today's FT, 'the increase in consumer prices index inflation since mid-2007 can be largely explained by rising global prices for food and energy. The deeper question, however, is why these have not been offset by slower rises or falls for other products and services, as would be expected if monetary policy had been correctly calibrated to meet the inflation target.' The MPC ' allowed excessively loose monetary conditions to develop between 2005 and 2007. Bank rate was cut inappropriately in 2005 and maintained below its neutral level until 2007. During this period, investors’ risk appetites significantly increased. The result was a prolonged period of buoyant money and credit expansion.' They discussed rapid money and credit growth in 2006 and 2007 but'played down the dangers'. The upshot is that official neglect of monetary warning signals has once again been followed by 'an unexpectedly large rise in inflation although the details of the transmission mechanism differ. In effect, loose domestic monetary conditions have accommodated or even supplemented the inflationary impact of rising global costs.' It is also suggested that there is liitle scope for further interest rate cuts in the near future. Read the article.

Government 'should change inflation target'

Consumers will be "crucified" unless the government changes its inflation target, a leading economist has warned. Peter Spencer from the influential Ernst & Young Item Club is urging ministers to change the 2% inflation target used by the Bank of England. He warned that interest rates would have to stay at 5% if inflation is to be brought down to 2%. He added that keeping interest rates at their current level would hurt hard-pressed households. Professor Spencer said consumers were paying the price for an inflation target that had become unrealistic given the volatility of oil and food prices. He called for the Bank of England's remit to change so it focused on "core inflation", a measure that excludes food and energy prices and is used in the US. Read details here.

David Smith's piece in the Sundaty Times also makes an interesting read, especially the divergence between base rate and other interest rates in the economy, those that have a real impact on economic activity. Link to article. Geoff Riley provides a summary of the key points on the tutor2u blog. Link

Does the CPI reflect the 'real' level of inflation in the economy?

A view from France

Greater competition, lower prices, must be welcomed by consumers. Not necessarily so, if the example of France is anything to go by. Many French consumers, unhappy at rising prices, inflation at a 17 year high and lower prices elsewhere in Europe, have reacted unfavourably to a proposed new law enabling more hypermarkets to be built to challenge local monopoplies and greater freedom for them to negotiate prices with suppliers. A poll showed that less than half favoured more competition as a solution to their concerns but rather a reduction in sales tax and a rise in the minimum wage.

Unlike the UK, hypermarkets are not allowed sell pharaceutical products, despite their claims that they could do so more cheaply. Despite a legal challenge, ' the pharmacists' monopoly remains—with Mr Sarkozy himself ruling out any change on the ground that pharmacies are not a business but a “public service”. ' Read the full article here.

How do firms set prices?

For economics students, obsessed with demand and supply diagrams, setting prices is child's play. But how do firms set their prices? What information do thay need to set a price that will hopefully clear the market. An interesting article in the FT, offering advice to firms about what to consider when setting prices in an economic slowdown. A key factor is to 'understand how price-sensitive customers will behave - and act on that knowledge more quickly than competitors'. Price sensitivity, a concept that should be familiar to students. Read the FT article here.

Water sector competition proposed

The water and sewerage industry should be opened up to competition, says regulator Ofwat. Competition was "severely limited by legislation" and had "not developed successfully", said Ofwat, the regulator in England and Wales. Opening up the sector would help it address climate change and water scarcity, as well as lower costs. Ofwat said it would challenge firms on price and service until competitof the syatem by whichion was "strong enough to protect customers".

The watchdog said competition would help "respond to the environmental challenge of water scarcity, which the government highlighted in its water strategy". It also said "markets could spur innovation in developing and making better use of water resources and more water efficiency services, supporting sustainable water abstraction". Read the BBC article here.

Think about the challenges the water industry faces. How could competiton help address these? What effect would greater competition have on customers? Would they be able to switch supplers easily? Would it lead to a reform of the way in which most customers now pay for their water?

UK unemployment rises by 14,000

UK unemployment rose by 14,000 to 1.61 million in the three months to March, official figures show. The number of people claiming Jobseeker's Allowance climbed by 7,200 to 806,300 last month, the Office for National Statistics (ONS) said. Analysts warned the figures may indicate that global financial problems were hitting the UK and could impact the labour market in coming months. The unemployment rate was unchanged at 5.2% in the three months to March. The figures come amid signs that the UK economy is slowing. At the same time, inflation has picked up, driven by higher food and fuel costs. Read the details here.

The Independent had the headline today 'The spectre of 'stagflation'; a combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come. Click here for the article.

Click for video from BBC News with an anlaysis of the change in Unemployment. The commnetator also makes the point that employment has also increased, with an attempt to explain how this can be the case.

With inflation rising to 3%, how influential will this rise in unemployment be in persuading the MPC to cut rates when it meets next month?

Why are food prices rising?

Food prices have been rising steadily in the past few months and the effects are being felt globally. As agricultural commodities such as wheat and dairy trade at record highs, some governments, such as Russia, are implementing price controls on selected types of bread, cheese, milk, eggs and vegetable oil. But why is food getting more expensive? What role do biofuels play and how has the weather affected crop yields this year? How does the cost of oil factor into the price of food? A really informative FT multimedia feature explains. Click here for link.

Headline inflation up to 3% - further interest rate cuts in doubt?

UK consumer inflation reached its highest level in 13 months driven by high food and fuel costs, according to the Office for National Statistics. The Consumer Prices Index (CPI) hit 3% on a yearly basis in April, up from 2.5% in March. The monthly rate was 0.8%, the biggest leap since May 2001. According to the figures, the Retail Prices Index rose to 4.2% from 3.8%. The inflation data would probably stop the Bank of England cutting interest rates in the near term, analysts said. "It was a pretty horrific headline number," said Lee Hardman, an economist at BTM-UFJ. "It limits the scope for monetary easing from the Bank, it will be hard for them to cut in June." However, some analysts added that the main drivers of price growth were fuel and food costs, which higher interest rates did little to control or rein in. UK inflation jumps to 3% in April

Listen to Melvyn King, Governor of the Bank of England, presenting this month's Inflation Report. Click here for link. He is quite pessimistic about the short term outlook but believes inflation will be back on target in the near future. He outlines clearly the inflationary pressures currently affecting the UK economy. Most significantly he stated that the NICE decade was over - NICE means non-inflation continuous expansion.

This BBC News clip explains the underlying pressure on prices. Click here for 'Why inflation keeps rising'.

Why do analysts think that further interest rate cuts are unlikely? What are the main causes of the current increase in prices? What type of inflation is this?

Ticket touts back in the news

Two interesting articles about ticket touts, a subject much discussed recently in recognition that they are unlikely to go away. The FT reported that Madonna is endorsing the sell-on of concert tickets, condemned by some concert promoters as scalping or touting, by making two leading companies in the secondary ticket market official partners for her forthcoming Sticky & Sweet tour of North America and Europe. Secondary ticketing companies enable the public to trade their tickets online with customers who are prepared to pay above their face value. The company takes a cut of about 10 to 15 per cent. Many sports promoters complain that they are not getting any share of the premium on these ticket sales and concert promoters in the UK have pressed unsuccessfully for the government to outlaw the practice. Madonna endorses seconday ticket markets

According to The Observer ticket touts will make more than £10m in the next week by cashing in on the success of Britain's football teams in Europe and at home But potential buyers are warned to be wary. It is illegal to resell football tickets in the UK - unless it is through an official, recognised third party. However, many of the online firms are able to flout the law by operating offshore, out of reach of the UK authorities. Details here.

Think about the market conditions that enable secondary markets (ticket touting) to exist. Should the law be used more effectively against them or should they be allowed to trade under certain conditions (eg give a percentage of the earnings back to the original body that issued the tickets)?

Further evidence of 'cost push' inflationary pressure.

A Confederation of British Industry (CBI) survey shows that manufacturers are raising prices as they face the strongest cost pressures in over 20 years.The CBI said that small and medium firms were struggling with high energy and raw material prices. However, there is some good news as the survey said that despite the prospect of higher costs, manufacturers were taking on new staff. The reasons appear to be that some firms are benefiting from the weaker pound and strong growth in Asia. At the moment price rises were affecting other businesses and had yet to transfer to consumers. Details here.

This was reinforced by further figures published by the government. The price of goods leaving Britain's factories rose at the fastest level in more than 20 years last month as soaring food and fuel bills pushed up the cost of production. In a fresh inflation warning to the Bank of England, the Office for National Statistics said so-called factory gate prices were up by 1.4% in April and by 7.5% over the past 12 months. Both were the highest since the series began in 1986. Read the article.

What factors will determine the ease to which firms can pass cost increases into consumers in the form of higher prices?

Crunch closes north-south growth divide

The north-south growth divide will close for the first time in six years as the credit crunch takes its toll on the City, a report out today shows. The difference will disappear next year for the first time since 2002 as London's economy slows down, said Experian, Britain's leading credit reference company. The south has been growing 1% a year faster than the north but this will change over the next couple of years as the credit crisis and consumer slowdown take their toll, especially on financial and business services. London's growth in average output per head - also known as gross value added (GVA) - will fall to 1.5% in 2009 from 2.3% the previous year. In the north-east, GVA will increase to 1.2% from 0.9% the year earlier. "London will see greater falls as it has a much greater share of GVA than the north," said Andrew Goodwin, managing economist at Experian. Read the article here.

What are the implications of a 'two speed economy'?

Repossession orders up by 17%

The effects of tighter credit and more expensive mortgage payments appear to be having an effect on the housing market with the news that respossession orders are up by 17% (27,530 orders made, up from 23,438 in the same period of 2007). An order is the first stage of the repossession process and whilst many of these homes won't be repossessed the upward trend is a cause for concern. Read details here.

Freeconomics - a new 'economic philosophy'?

International flights that don't cost a thing? Books or music you don't have to pay for? Even companies handing out cars? Traditional business is based on the certainty that everything has a price. But now US writer Chris Anderson believes we are at the dawn of a new consumerist era, governed by what he dubs 'freeconomics'. A very interesting article in The Guardian exploring this new econimic thinking.

Anderson's freeconomics thesis is that more and more goods and services are being provided for free and that those businesses that fail to follow suit are likely to go to the wall. "As much as we complain about how expensive things are getting, we're surrounded by forces that are making them cheaper," Anderson wrote in a recent article that will form the basis of a book called Free, to be published next year. "Forty years ago, charity was dominated by clothing drives for the poor. Now you can get a T-shirt for less than the price of a cup of coffee, thanks to China and global sourcing. So too for toys, gadgets and commodities of every sort. Even cocaine has pretty much never been cheaper (globalisation works in mysterious ways)." He explores the impact of the internet in the way it has revolutionised economics by reducing the marginal cost to suppliers. "On the web, the marginal costs of manufacturing and distribution are zero, or close to it. This means that you can now experiment with giving away one thing to sell something else much more than you could in the pre-internet era."

Read the article here.

Could all goods and services be provided 'free'?

Postal competition has created 'no significant benefits'.

The liberalisation of the UK postal service has produced "no significant benefits" for either households or small businesses, a report has said. That is the initial finding of an independent review of the UK postal sector commissioned by the government. It warned there was now a threat to the Royal Mail's financial stability. The Royal Mail's 350-year monopoly ended at the start of 2006, when other licensed operators were given the right to collect and deliver mail. View article here.

While the initial report said homes and small firms had not gained from the increased competition, it said large companies had "seen clear benefits from liberalisation - choice, lower prices and more assurance about the quality of the mail service".

There is still no significant competition in the delivery of letters, due perhaps to "significant barriers to entry." View The Guardian article here.

Think about why potential competitors are unwilling to challenge Royal mail in the area of household letter delivery. In spite of deregulation, what barriers to entry are still likely to exist?

Thailand calls for a rice cartel

Thailand wants to form an Opec-style rice cartel to give it more control over international rice prices. The world's biggest rice exporter plans to talk to Laos, Burma, Cambodia and Vietnam about co-operating on prices. Rice prices have tripled so far this year with countries such as India and Vietnam restricting their exports. But the idea was met with opposition. The Philippines, the world's biggest importer of rice, also raised objections. "Almost three billion people are rice eaters," said Edgardo Angara, chairman of its senate committee on agriculture. "It's not a good idea, it's a bad idea. It will create an oligopoly and it's against humanity." BBC News

Think about how a cartel of this nature would have control over rice prices. Who would gain from such an arrangement?

No UK recession, economists say

Britain's economy will remain shaky but will narrowly avoid recession as long as another Northern Rock is not around the corner, according to a report out today. The prediction, from the National Institute of Economic and Social Research (NIESR), comes after data released yesterday showing that activity in the country's manufacturing sector declined in April to its second-lowest level in two years. NIESR forecasts that growth will weaken to around 1.8% this year and next, from 3% in 2007, as a result of the credit crunch and soaring oil prices.

No recession, economists say - provided there are no more Rocks

How reliable is this forecast? Does it agree with other recent forecsasts?

House price fall confirmed

UK house prices saw an annual fall of 0.9% in April, says the Halifax, the UK's biggest mortgage lender. The Halifax also said that prices dropped by 1.3% in April compared with the previous month, pushing the price of the average home down to £189,027. The lender said it now expected a "mid-single-digit" percentage decline in prices in 2008. But it expects bigger falls in Wales and the West Midlands, with Scotland bucking the trend with a modest rise. Halifax's chief economist, Martin Ellis, said the decline in prices was driven by a squeeze on consumers' spending power and the rapid rise in house prices in the last few years. BBC News

House prices down by 0.9%, says Halifax

See this interactive graphic from The Guardian charting the movement of house prices over the past two years and possible reasons for changes. Link