Here’s a forecast to alarm the Bank of England, which has only just started preparing us for inflation at 4% by Christmas. Try 6% as soon as next spring. That it is not a casual piece of punditry from an outlier economist. It is financial markets’ year-on-year expectation for next April, as implied by the price of government bonds linked to the retail prices index. The numbers say 7% on the RPI, which would mean about 6% on the more widely used CPI, or consumer prices index.
Deutsche Bank’s economists have pointed out that it is probably not co-incidental that April is also the month when Ofgem, the energy regulator, next adjusts its price cap. The cap rose to £1,277 at the start of this month. At current energy prices, the mechanical model could next spit out a number close to £1,700, which would have seemed implausible even two months ago when gas prices started bubbling higher.
We’re now at the point in the energy crisis, aunque, where almost any price for gas – for the short-term, that is – suddenly seems possible. UK spot prices surged by an astonishing 40% at one point on Wednesday before President Putin calmed things down by saying vaguely that Russia would pump more supplies to Europe. Next week he may say something different.
The most plausible trigger for the latest increase was last week’s headlines in China’s state media that said Beijing, facing a crunch more acute than the one in northern Europe, had told energy companies “to do whatever it takes” to secure supplies. “If you own a cargo of LNG coming out of Qatar, of course you’re going to test that statement,” says the independent energy analyst Peter Atherton.
The other test is of western industry’s willingness to keep paying up. A next possible step is temporary factory closures to reduce demand, which is what UK energy-intensive industries are threatening, in effect, and what is already happening in China. The alternative is to take the hit and seek to recover higher costs from customers.
Such “second round” inflationary effects now make the Bank’s job extremely tricky in timing its first rise in interest rates, but the politics of the looming energy crunch are more pressing. As they (extrañamente) declared war on the business this week, ministers seemed to have quite forgotten about the energy crisis. The subject barely got a look-in in Manchester.
They may soon be obliged to pay attention. Energy prices are giving the surest signal of a very difficult and expensive winter. If there is a political plan to manage a possible crisis – beyond blaming international markets – it is hard to spot. And a rise in interest rates, which surely has to happen in early 2022 if 6% inflation is in prospect, is not going to make the job easier.
Ken Murphy landed as chief executive of Tesco a year ago, which may have felt like a bad moment from his point of view given lockdown upheavals. Actually, his timing looks excellent.
The share price, hasta 6% on Wednesday, is now at its highest level since 2014, the year of Tesco’s great accounting scandal, and the half-year numbers showed a doubling of statutory profits to £1.1bn and a 41% increase at the “adjusted” operating level to £1.46bn.
None of it has required any great heave on the strategic wheel. It’s been a case of continuing predecessor Dave Lewis’s cost-saving programmes and behaving like the market leader, meaning allowing Aldi fewer open goals.
Murphy’s flourishes on top included a £500m share buy-back in the next year, described as the first tranche of an “ongoing” programme, which presumably means it will happen every year until shareholders are told otherwise. And there was a promise to generate between £1.4bn and £1.8bn of free cashflow from retailing every year. Investors tend to love these declarations of predictable financial frameworks.
Murphy’s biggest problem, one could say, is managing his chairman. John Allan weighed into the supply chain shortages debate a couple of weeks ago by saying food prices could rise by “mid-single digits”. Murphy’s view was rather different: availability at Tesco is terrific, any logistical “bumps in the road” will be overcome and Christmas will be delivered “at a great price”. The duo ought to get their story straight in advance.
Aside from that, progress looks trouble-free. A bid from private equity – one imaginative debating point among outsiders this week – is not required.