ALEX BRUMMER: Questions about inflation trends cast a shadow

ALEX BRUMMER: Questions about whether inflation will be transient once we get out of the pandemic or will last longer cast a shadow

Anyone hoping for a failure or a shared decision on inflation trends at the Monetary Policy Committee meeting in August will be deeply disappointed.

Outside guru Michael Saunders, in the absence of a replacement for chief economist Andy Haldane, took the deviant role and voted to cut the purchase of gilts by £45bn.

Saunders’ voice is a bit academic in the sense that money printing is almost over, but it’s reassuring to have someone out there willing to puncture groupthink.

Anyone hoping for a failure or a shared decision on inflation trends at the Monetary Policy Committee meeting in August will be deeply disappointed.

The big debate among MPC members is whether inflation will be transient once Britain and the world emerge from the pandemic, or whether something long-lasting has happened.

The Bank has slightly revised its monetary forecast, arguing that modest tightening may become necessary over the two-year period. It has also committed to phasing out some quantitative easing at an earlier point in the interest rate cycle.

These are tiller adjustments rather than something dramatic. In the real world of businesses and consumers in the UK, there are some lights that blink amber. Meeting the huge challenge of climate change will rapidly increase energy costs if carbon emissions are to be reduced.

The large increase in the price of raw materials, such as copper used for conduction in fuel cells, electric vehicles and the like, is an example of this. That fuels the cost of consumer goods and possibly fuel prices.

As Taylor Wimpey’s results showed this week, higher house prices are entrenched and will trickle down into inflation indices. The Bank may have to take immediate action to limit lending. The great unknown is the labor market.

Thoughts of mass unemployment as the furlough are settled are gone, and with the development of labor shortages in everything from social care to logistics, employers will be pushing revenue upwards. No one wants to kill the recovery before the lost Covid-19 output is regained. But one cannot help but think that there is too much complacency about rising prices.

Flight route

Rolls-Royce faced an existential crisis during the pandemic as flight hours for its engines collapsed and emergency financial aid was instituted

Rolls-Royce faced an existential crisis during the pandemic as flight hours for its engines collapsed and emergency financial aid was instituted

Pressure on Rolls-Royce should be significantly eased by an early return to profit and the promise of cash generation by the end of the year. The aerospace group faced an existential crisis during the pandemic when flight hours for its engines collapsed and emergency financial assistance was instituted.

With large fighter jets taking to the skies again, cost savings with up to 9,000 colleagues leaving the company and defense revenues soaring, the group’s future is more secure. After reforming the company, CEO Warren East feels confident enough to envision a future where Rolls will rely less on its Trent engine and have a greener outlook.

It plans to supply the engines for an electric-powered vertical take-off aircraft being built in Bristol with £4 billion in orders on the books. It will soon announce funding for a special vehicle for the development of Rolls-Royce designed small modular reactors (SMRs) to be designed in the UK. That should put Rolls at the center of the UK’s decarbonisation.

East believes there is a target market for the flexible reactors around the world worth £250 billion. Rolls is missing out on new orders for single-aisle jets, but is hopeful that when a next generation of narrow-body jets arrive, a smaller version of the Trent will be ready.

Flight hours on the larger jets rose to 43 percent from pre-pandemic levels in the first half and there are indications that they should reach 55 percent full-year and 88 percent by the end of 2022. The return to earnings list was made possible by increasing amounts of defense work. Rolls thinks it has a good chance of picking up a Pentagon order for the new version of the B-52 bomber. Fingers crossed, because of British engineering.

copper bottom

New Glencore CEO Gary Nagle can't complain too much about predecessor Ivan Glasenberg's financial legacy

New Glencore CEO Gary Nagle can’t complain too much about predecessor Ivan Glasenberg’s financial legacy

New Glencore CEO Gary Nagle can’t complain too much about predecessor Ivan Glasenberg’s financial legacy. Strong rises in metal prices, including copper, cobalt and nickel, coupled with booming commodity trades fueled a sharp rise in profits in the first half.

Share buybacks are in full swing and debt has been reduced from £11.4 billion to £7.6 billion. Major infrastructure spending by the Biden administration in the US, along with rising green investment around the world, is likely to keep commodity prices high. It may not be a super cycle, but it’s close.

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