The news that CPI inflation rocketed from 2.8% to 3.1% in March – occasioning the first letter of explanation from the governor of the Bank of England in the 10 years since the Bank gained independence – will have been met with disappointment by the Committee. Its unease will have been compounded by the additional bad news that RPI inflation rose from 4.6% to 4.8%, its highest level for 16 years.

In his letter to the chancellor, Mervyn King explained that several one-off factors had come together to push inflation above 3%, including the fact that businesses had become more confident that they could raise prices to rebuild profit margins. The governor expects inflation to fall back sharply over the summer months, as the substantial increases in household gas and electricity prices that occurred a year ago drop out of the annual comparison.

Two dollar barrier
On the same day the inflation data were announced, the pound burst through the $2 barrier for the first time in nearly 15 years. The two events were not unrelated. Sterling has been strengthening for a while and it was only a matter of time before the $2 level would be breached. The near certainty that the UK will have higher interest rates in May gave sterling its final push.

A strong pound is a mixed blessing. While it is good news for British travellers to the US, it makes British-made exports to the US, our biggest export market, more expensive. On the other hand, since many internationally traded commodities, including oil, are priced in dollars, the strong pound makes importing them cheaper.

Not all the recent economic news points unambiguously in the direction of an interest rate hike. After a 1.6% rise in February, retail sales volumes increased by only 0.3% in March. Year-on-year growth slowed from 5.1% to 4.8%. Despite the slower growth, retailers pushed up prices at their fastest pace for six months. Other data shows that manufacturing output dropped for the second month in a row in February, pushing the three-months ‘growth rate’ to -0.2%, the first negative figure for more than a year. In addition, the National Institute of Economic and Social Research estimates that GDP growth in the first quarter will have slowed to 0.5%, the poorest performance since the third quarter of 2005.

The latest British Chamber of Commerce (BCC) quarterly survey is not too cheery either. It reports that growth in business activity has eased back and that both service and manufacturing firms are no longer expecting to raise prices aggressively. The BCC says that manufacturers in particular have encountered more price resistance than they expected. Next quarter’s BPIF Directions survey should show whether this is also true for the print industry.

Despite some arguments to the contrary, the decision facing the MPC is whether to raise interest rates by ‘normal’ 0.25% or to go for a ‘shock’ 0.5% hike. It will probably go for the former, partly so that it does not spook the markets and partly in anticipation that four 0.25% rises in less than 12 months will have the desired effect of subduing inflation.

In other economic news, corporate profitability, measured as the net return on capital employed (ROCE), reached 15.1% last year, the highest level since records began in 1965. Even excluding the amazing levels of profitability achieved by the oil and gas companies (40.7%), profitability was at its highest level since 1998 at 13.9%. Not surprisingly, the service and manufacturing sectors showed different trends.

While service sector ROCE improved to 19.7%, manufacturing ROCE fell for a second successive year to 8.5%, its lowest level since the recession of the early 1990s. Of the printing industry’s top 500 companies, 260 managed an ROCE of 8.5% or better in last year’s PrintWeek Top 500.

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David Ross is an independent economics consultant running his own business, Ross Economics & Editorial Services Ltd. Contact him at: dh.ross@btinternet.com.