What a surprise - wheat supplies are higher than previously thought

Some readers will recall a minor controversy that occured a few weeks ago regarding the underlying causes of higher food prices. There were two views. Some thought that higher prices were primarily due to fundamental changes in the world economy. Economic growth in the Far East was generating higher demand, while climate change was disturbing production.

An alternative view pointed to lower interest rates and the potential for speculative pressures to push prices far beyond any changes in economic fundamentals, such as higher demand from emerging economies or supply shocks.

The first view, which could be called the fundamentalist view, were keen to point to a reported decline in government holdings of agricultural stocks (which were often erroneously described as inventories).

The fundamentalists position took a severe knock today. The US agricultural department has just published its latest market report. It made very interesting reading. Here are a few selected highlights:

• There is more US supply and government stocks than previously thought - U.S. wheat ending stocks for 2010/11 are projected higher this month on reduced export prospects. Projected exports are lowered 25 million bushels with increased world supplies of high quality wheat, particularly in Australia, and a slower-than-expected pace of U.S. shipments heading into the final quarter of the wheat marketing year.

• There is more global supply - Global 2010/11 wheat supplies are projected 1.9 million tons higher reflecting higher production. Argentina production is raised 1.0 million tons based on higher reported yields. Australia production is raised 1.0 million tons with higher yields in Western Australia where wheat quality was not hurt by harvest rains as in the east. Other production changes include a 0.5-million-ton reduction for EU-27 with a smaller crop reported for Denmark and a 0.6-million-ton increase for Saudi Arabia on an upward revision to area.

• World demand is lower than expected - Global 2010/11 wheat consumption is projected lower with the biggest change being a 1.5-million-ton reduction in expected wheat feeding for Russia. With increased global production and reduced usage, world ending stocks for 2010/11 are projected 4.1 million tons higher.

There are those who love to talk up a crisis. There are others who know how to profit from such talk. Then there is the rest of us, who end up suffering from the joint activites of the miseralists and the speculators.

Over the last month, wheat prices have fallen sharply. A bursting bubble perhaps?

No rate rise

If not now, then when?

The MPC again ducked out of the difficult but necessary task of raising the bank rate. It is not obvious what they are waiting for. Inflationary pressures have grown considerably stronger over the last six months. The MC have just sat there in their oak panelled meeting room, watching passively as the rest of us have inflation hit five percent.

Wishful thinking won't deliver price stability. Talking tough doesn't do it either. The only known cure for rapidly rising prices is higher interest rates.

Great shot

Libya's main oil terminal was in flames on Wednesday night after Muammer Gaddafi's airforce bombed the complex, in an escalation that pushed the cost of the benchmark Brent above $115 a barrel

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Libyan oil wasn't the only thing destroyed by Ghaddafi's planes. The Bank of England's inflation forecasts also took a direct hit.

King fails to convince the Treasury Committee

Mervyn King is again trying talk down inflation. He told the Commons' Treasury committee that "inflationary pressures [will be] pretty much back to target by around the middle of this year".

King confirmed that the Bank's counter-inflationary strategy is unchanged. It will try and wait out what it regards as a series of one-off shocks such as higher taxes and oil prices. By the summer, these effects will have fed through into consumer prices and gradually fade out thereafter.

However, he had to concede that inflation will rise at a seasonally adjusted annualised rate of almost 7 per cent this quarter. He also had to acknowledge that the inflationary outlook could deteriorate if the political situation in Middle East went pear-shaped, leading to a further increase in the cost of oil.

He also had to admit that the Bank had under-estimated the impact of both the commodity price inflation and the persistent effects of the exchange rate depreciation.

So to summarize; the bank believes that inflation will fall all by itself; there are alarming downside risks to the inflationary outlook and the Bank has accumulated an uneviable record of under-estimating inflationary pressures.

That settles it; no need for a rate rise.

Andy Sentance explains why a rate rise is necessary

Andy Sentance lays out the case for a rate rise in a recent speech entitled - Ten good reasons to tighten:

The MPC is accountable through its mandate to keep consumer price inflation at 2%. The mandate acknowledges that fluctuations will take place due to factors outside the MPC’s control. However, such factors causing deviations of inflation from target might be expected to be temporary rather than persistent. That has not been our experience, though.

Inflation has been above target for most of the time I have been on the MPC and some of the upward deviations have been quite significant. This creates a much stronger platform for tightening monetary policy than if we had experienced simply a “one-off blip” in inflation. The average CPI inflation rate while I have been on the MPC – since October 2006 – has been around 3% and over the past three years it has averaged 3.5%. In January it was 4.0%. In addition, CPI inflation is expected to rise higher in the short-term before falling back.

Indeed, since 2009, when the MPC put in place the current policy settings, inflation has persistently run ahead of the official forecasts set out in the Bank of England Inflation Report.

It is a must-read speech....

Rates must go up

Andrew Sentance, MPC member, again called for higher rates in the face of growing inflationary pressures:

"The time has come to increase interest rates. We should increase them gradually and slowly if we can. But the risk of delaying interest rate rises too long is that this gradual approach may cease to be an option in the future."

Six months ago it might have been possible to gradually increase interest rates. Unfortunately, the Bank of England is so far behind the curve that only a sizable rate hike will have a significant effect on rising prices.

Events in the Middle East have cruelly exposed the 'wait and see" stance of the more passive members of the committee. The sudden surge in oil prices will inevitably push inflation towards the top end of the Bank's inflation projection, at least in the short run. While a fall in the oil price is likely over the medium term, this decline won't come before inflation hits five percent. Indeed, if uncertainty in the oil market is protracted, then inflation could easily hit six percent by summer.

An earlier movement on rates, coupled with an unwinding of quantitative easing, would have put the Bank in a better position to deal the the recent commodity price shocks.

Now, the Bank must make up for the mistakes of the past. Delay will only make the evitable adjustment more painful. Rates must go up.

MPC are quoting writers instead of hiking rates

The monetary policy committee has started to communicate in aphorisms. Both David Miles and Adam Posen cracked open a dictionary of quotes in order to spice up recent speeches on the state of UK monetary policy.

David Miles, External Member of the MPC used the following quote from Milan Kundera, (Testaments Betrayed) in a speech to the CEPR in London:

"Man proceeds in the fog. ....... Yet when he looks back to judge people from the past, he sees no fog on their path. From his present, which was their far-away future, their path looks perfectly clear to him, good visibility all the way. Looking back, he sees the path, he sees the people proceeding, he sees their mistakes, but he doesn't see the fog."

Yes, David, we know that. The future is confusing and the past is clear. Nevertheless, decisions have to be made about the future path of monetary policy. Moreover, the mist seems to be clearing. Recent CPI data has strongly signaled that inflationary pressures are growing.

Adam Posen was a lot more obscure. He gave a recent speech on inflationary expectations and lifted the following gem from Walter Bagehot.

“A democratic despotism is like a theocracy: it assumes its own correctness.”

I can't see the immediate connection with interest rates. Is he hinting that while there is democracy within the MPC, there is no political accountability. Therefore, the UK monetary policy framework is like a democratic despotism? What does "assuming its own correctness" mean? Of course, I know what the words mean, but I don't see the relevance.

Enough of this pretentious nonsense, in monetary policy there is only one quote that matters. It is from Milton Friedman. It comes from his 1970 book The Counter-Revolution in Monetary Theory:

"Inflation is always and everywhere a monetary phenomenon."

If the MPC had remembered this quote, the UK inflation rate wouldn't be four percent and rising.

Oil price fear mongering

Personally, I think oil prices will stabilise as soon as political unrest subsides in the Middle East. The recent spike in prices is just a rather largish blip on a well established long run trend increase in prices.

Nevertheless, there is a lot of alarmist scaremongering out there for those who like a pessimistic tinge to their daily news stories.

There is more to UK inflation than just external shocks

The Bank of England are keen to blame external shocks as the primary driver behind the recent surge in inflation. Is it true? To what extent is inflation just another import?

UK import prices have been surprisingly flat for the last 18 months. In December, import prices were up by 2.7 percent compared to the same month the previous year. That is one full percentage point less than a headline CPI inflation rate.

When the financial crisis started, UK interest rates fell sharply, and sterling depreciated significantly. The impact of the devaluation on import prices is easy to see. As sterling tanked, importers hiked prices by around 15 percent, although they gave back some of that increase once sterling settled back to its new lower level.

As an aside, this import price overshoot points to the dangers of trying to depreciate your way out of a financial crisis. Once the exchange rate starts to fall, importers try to anticipate the decline in sterling and add something to prices to compensate for the uncertainty.

Still, the main point is that there is much more driving the UK inflation number than the post crisis exchange-rate depreciation and the rise in import prices.

Playing catch up

"We (the monetary policy committee) would be better placed to head off the upside pressures on inflation which are now apparent if we had taken earlier policy action.

And the risk is that when policy tightening does start, it will be overdue and the MPC will be playing catch-up – which is not a good scenario for recovery prospects."

Andrew Sentance, external member of the Bank of England's monetary policy committee

The monetary miracle is over

One should never underestimate the importance of luck. For almost a decade, the Bank of England proved to be very fortunate. It managed to simultaneously keep interest rates low, dramatically increase the money supply, and at the same time meet its inflation target.

How did it pull off this monetary miracle? The chart above provides a comprehensive explanation. It breaks the CPI inflation rate down into two components; the rate for services, which are mostly produced domestically; and rate for goods, which are almost entirely imported into the UK.

As the chart illustrates, prices for domestically produced services have grown fairly consistently at between three and four percent a year. This is far in excess of the Bank of England's inflation target. Prices of goods, on the other hand, were falling between 2000 and 2006, exerting powerful downward pressure on the aggregate inflation rate.

The reason for this negative inflation rate for goods is well understood. China industrialised, and exported huge quantities of clothes, footwear, and electronics. Prices for these items fell massively. In contrast, domestically produced prices increased rapidly in response the the extraordinary surge of Bank of England inspired monetary growth.

For many of us, this inflationary dichotomy between its goods and services will ring true. Anyone who regularly hired an accountant or chose to educate their children privately will be familiar with the four percent a year price hike.

So, it is fairly easy to see how the Bank of England got away with loose monetary policy and low inflation. Nevertheless, there is a more intriguing question embedded in this chart. To what extent did the surge in goods prices trigger a financial crisis?

To see how the turn-around in import prices might have precipitated the crisis, it is worth remembering how monetary policy worked in the past. In previous decades, rapid credit growth would have quickly fed through into prices. Eventually, interest rates would have increased, credit growth would have subsided, the economy would have slowed, and eventually inflation would have moderated.

This didn't happen in a decade before the crisis. Credit exploded while the overall inflation rate remains subdued on account of cheap imports. The Bank of England didn't feel obliged to raise rates, and the credit bubble just kept on growing.

Unfortunately, the old trade-off, like an unwelcome relative, returned in 2006. Inflationary pressures were building in the East,and import prices began to increase.

There were tentative signs of trouble in 2005. The Bank of England made a half-hearted attempt to raise interest rates to stem inflationary pressures. But the monetary policy committee took fright when it saw the property market weaken. Rather than tackle the growing inflationary menace, the committee buckled, reduced the bank rate and gave the housing bubble a new lease of life.

This weakness before the inflationary enemy resulted in renewed price pressures. In the early months of 2007, the Bank of England and its sister institutions in the US and Europe, were belatedly hiking interest rates.

This changing policy stance was sufficient to expose all the poor lending practices and financial sector abuses that had built up through the previous decade. Many banks, particularly small ones like Northern Rock, had cut interest margins to the bone and jacked up their leverage ratios. The slightest perturbation of interest rates and the financial system was in deep trouble.

The rest of the story you know.

So here we are - four years on from the crisis - and inflation has hit 4 percent, and it is likely to go higher. The Bank of England now believes itself to be trapped. It fears to raise interest rates on account of what it thinks a rate hike might do to the frail recovery. As for dealing with inflation, it has no strategy. There is no plan, just a vague hope that somehow things will turn out alright in the long run.

In fact, there never was a plan. The only thing that kept inflation down for ten years before 2006 was luck and a flotilla of Chinese cargo ships packed full of goods.

Watch out Mervyn, the press are starting to turn....

The UK press are starting to question Mr. King's competence...


The Guardian

His letter to George Osborne had a familiar ring about it. Yes, inflation remained well above target, but that was due to the weakness of sterling, rising commodity prices and the increase in VAT. For some in the markets, this explanation is wearing thin, and has become as unconvincing as the boy who tells teacher that the dog ate his homework.

The Telegraph

Cheap money has thus not only fuelled inflation, but has created a climate in which talk of any rate rise triggers concern that we may be tipped back into recession. Stuck in this vicious circle, it is no surprise that Mr King openly acknowledged yesterday that the MPC is split on the future direction of policy.

BBC

Mervyn King's 10th letter to Number 11 Downing Street is similar to many of the other ones he's written. In his view, the 4% rise in the CPI in the past 12 months is unfortunate - but temporary, and almost entirely driven by factors beyond the Bank's control. He insists that the MPC has not "lost control of inflation".

The Spectator

Now that today’s inflation figures are up, to a predictable and predicted 4.0 percent on CPI and 5.2 percent on RPI, we can expect the usual response. Nothing from the government (even though the declining standard of living will eclipse cuts as the no.1 problem of 2011); plenty of shocked news stories; and, then, the round of commentators saying that Mervyn King should “hold his nerve,” and not increase the absurdly low base rates of 0.5 percent. Inflation is temporary, he says, and should be okay again this time next year (that’s what he said about the start of 2011).

Looking through inflation

I enjoyed reading these paragraphs in Philip Aldrick, and Emma Rowley piece on inflation, which appeared in the Telegraph:

For the past three years the (Bank of England) has got inflation consistently wrong. Just last year, it predicted the current quarter's inflation figure would be 1pc. When the ONS publishes a figure four times that level on Tuesday, it will only aggravate concerns.

The Governor and his cohorts have a formula for dealing with overshoots now. The Bank needs to "look through" inflation, King says. Shear off the one-off events, oil price spikes, poor harvests that lead to food price rises, the inflationary effect of the pound's devaluation and the VAT rise. Strip all that out and domestically generated inflation in the past four years has been "close to zero and obviously well below the target", King said in Newcastle last month.

"Looking through inflation" - as if we couldn't see it every time we enter a supermarket.

Aldrick and Rowley’s article hints at some deeper problems of monetary policy management. Over the last quarter of the 20th century, a consensus developed that price stability should be the primary focus of monetary policy.

In order to deliver low and stable inflation rates, a parallel consensus emerged. Central banks should be independent of political control and receive a unambiguous mandate for which they are then held accountable.

In order to make this mandate operational, Central banks needed a data-based standard. This meant choosing a single price index, which was compiled independently of the central bank. A third consensus developed. The Consumer Price Index was to be that benchmark, and it was to be produced by an independent national statistical office. (As an aside, I always thought that this was the wrong benchmark, because it excluded house prices. But let’s leave that objection at the cloakroom for fear that it might obscure my central argument. )

In summary, modern monetary policy had arrived that three points of agreement:

• Monetary policy should be directed towards price stability:
• Central banks should be independent:
• The CPI should be the metric for measuring the central bank’s success in meeting its primary objective.

Unfortunately, the Bank of England failed to abide by this social contract. Instead of maintaining price stability, it has chased growth with paltry results and kept the banking sector afloat at the cost of higher inflation.

This race for growth has compromised its independence. Today, the monetary policy committee looks more like a gaggle of incompetent and unelected politicians rather than a group of competent, rational, data-driven bankers.

As for the transparency of the CPI benchmark, the Bank has tried to detract our attention from it by a litany of self serving excuses about global shocks, oil prices, VAT and whatever else seems convenient to put forward as an explanation for unacceptably high inflation.

It is all rather disappointing. There was a time when I though an independent central bank was the answer. Perhaps, this explains my anger what has come to pass as monetary policy. The consensus could have worked, if only the MPC had understood what it had signed up for - keeping inflation under control.

Inventory? What inventory?

Does the lack of movement in published grain stocks invalidate any claim of a connnection between monetary policy and food price inflation?

New York journalist and one-time economist - Paul Krugman - thinks so. He doesn't see an "accumulation of inventory." Higher inventory would suggest hoarding, an important "signature" or marker of speculation. This point about inventory is mostly directed towards wheat, which has seen an extremely sharp run-up in prices.

Since Krugman lives in New York, it is perhaps understandable that his knowledge of farming is a little limited. There is no such thing as data on inventory. The USDA produces a time series called grain stocks.

This number is not the same as inventory, at least not in the sense used by Mr. Krugman. This stocks number has very limited coverage, focusing mainly on government holdings of grain. The USDA produces these estimates largely by looking at grain reserves in the US and reading reports produced by other governments.

Most countries run strategic grain reserves, and there is some limited data for what governments are holding. However, these reserves are disbursed across many sites across the world. Often there is wastage, theft, and misreporting. To put the issue in perspective; does anyone really think that the grain supply numbers coming out of say, Chad are accurate? Undoubtedly, the Chadian authorities are doing their best, but gathering comprehensive data on grain storage is not as easy as New York journalists might think.

In some parts of the world, grain markets are subject to government intervention, and price controls. This increases the incentives for corruption and misreporting. In more than one country, grain reserves have mysteriously disappeared, especially when food prices have suddenly accelerated. We should never forget there are some very powerful incentives at work here.

To make the point more forcefully, does anyone really think they know how much grain the private sector are holding? If private wholesalers are hoarding grain, I doubt very much that are reporting their stocks accurately to government officials. If prices are going through the roof, the incentives to hide grain are very potent.

Just to be clear, I am not saying we know nothing about grain stocks. I am sure the numbers coming out of the US, the EU and Canada are reliable. But strategic grain stock numbers from Russia, Kazakhstan and Ukraine? There I pause for a moment and wonder. Maybe, these numbers might be in the ballpark of the truth, but I would treat them with caution. As for private sector holdings of grain, only the Almighty knows that number.

There are estimates of production, which are partly taken from satellite imaging, and assumptions about yield per hectare. There is an obvious relationship between amounts produced last year and likely stocks this year. It is helpful, but I would feel uncomfortable about relying on those numbers.

Furthermore, when I hear that the USDA project a 5 percent decline in production, I am inclined to believe it. Nevertheless, reported harvests have been very good over the last few years. Even a five percent decline still puts the projected 2011 harvest up there in the top five years over the last two decades or so. However, none of this tells me very much about the true underlying level of world inventories.

Nevertheless, we shouldn't take too seriously any argument suggesting that speculation in food markets is implausible, simply because there is a lack of inventory build-up. It is the sort of argument that city folk make. Country people know better.

We must rely on what we can see; prices. We need to make a judgement about whether prices have deviated from long run fundamentals. As my last post indicated, prices seem to have jumped a long way from trend. To me, this smells of speculation.

Food price speculation is obvious - just look at the data

World food inflation is the crisis of the moment. Prices for basic commodities are rising across the world, causing enormous distress, particular for the poorest and most vulnerable.

There are several ideas running around the internet seeking to explain this appalling state of affairs. As I mentioned in previous posts, these explanations can be grouped into three broad categories;

• Rising demand due to rapid economic growth in emerging markets, expecially in Asia:


• Supply shocks reducing the quantity of available food:


• Speculation and the search for higher yield, which has been facilitated by negative real interest rates in the developed world.

There is a difficulty in adjudicating between these three explanations. All three are, to some extent, true. They are not mutually exclusive. Nevertheless, we need to arrive at a relative weighting. Which of these three factors is the real driver behind the devastating rise in food prices?

It helps to clarify how these explanations might show up in the data. The Asian growth story is about fundamentals. If it is true, it will turn up in the data as long run trend . Since Asia has been growing for at least a decade, this upward trend needs to be there from the early 2000s.

The supply shock story is about deviations around the trend in prices due to year-on-year climatic differences. It is also commodity specific. Different commodities are produced across the world under different conditions. One year, wheat supply is down, but banana supply is up. Read the next sentence carefully, because it is important. An aggregate food price index will smooth out commodity specific shocks. Supply shocks hardly show up in an aggregage index, and if they do, it is as comparatively small fluctuations around the trend, and only to the extent that climatic fluctations affect all commodities.

Now we can define a bubble - it is a temporary deviation from the long run trend. Prices shoot up, and then crash.

So, what do we see in the chart above? First, there has been a long run trend upwards in food prices. This trend started in 2003 and it is illustrated in the chart by the blue arrow. This, I venture to suggest, is the Asian demand story.

However, there are two undeniable massive deviations from this trend. The first occurred in 2008. Food prices shot up, jumping massively away from the trend and then came crashing down and returned to trend. Hands up, please. is there anyone out there who does not think that this was a bubble?

The second deviation is underway now. In terms of orders of magnitude, it is at least as dramatic as the 2008 bubble. Give it a year or so, and I reckon food prices will come crashing down, just like the 2008 bubble.

This is not an "either or" issue. World food prices have exhibited an upward trend for at least seven years. This is consistent with strong demand in Asia. Higher Asian demand can sit perfectly comfortably with a speculative surge generated by irresponsibly low interest rates.

However, neither Asian demand nor climatic fluctuations can not explain the two recent massive surges in food prices that occurred in 2008 and from June 2010 onwards. These are clearly deviations from long run trends; these are bubbles. To understand why food prices are now suffering from a speculative surge, one needs to understand how financial markets operate, especially when interest rates are abnormally low.

Yes, food prices are increasing because of speculators

World food prices have become highly politicised. Two views are battling it out. First up; the supply-siders, such as Paul Krugman and Ben Bernanke, who claim that prices are up because of global warming, declining harvests and world population growth.

Then, there is everyone else, who claim that it is the fault of speculators.

Here is how Mr. Krugman put it:

"What’s behind the surge in food prices? The usual suspects have made the usual claims — it’s all about the Fed, or it’s all about speculators. But I’ve been looking at the USDA World supply and demand estimates, and what stands out from the data is mainly that we’ve had a huge global harvest failure."

He also said:

"..it sure looks like climate change is a major culprit. And it’s not just the (Former Soviet Union): extreme weather elsewhere, which again is the sort of thing you should expect from climate change, has played a role in bad harvest around the world."

Lets dispense with the climate change issue first. World wheat supply fell by 0.1 percent in 2010, and it is projected to fall by 5 percent in 2011. As the chart below suggests, there is nothing unusual about recent supply developments. In fact, projected 2011 wheat production is the fourth highest since 1995.

The World supply of wheat jumps around every year. This is due to fluctuating weather conditions. Anyone with a passing knowledge of farming knows that. Is the recent fall due to climate change - absolutely not. Linking recent food inflation to climate change is just absurd.

However, climate change point was merely an addendum to Krugman's argument. What about the more substantive point linking food inflation to a supply shock?

All speculative bubbles start with some kind of supply or demand shock. It is part of the pathology of speculation. The more substantive issue is whether originating shock can fully explain the subsequent price movement. In other words, can a 5 percent reduction in supply generate the following price movements?

Wheat prices are up about 50 percent in six months. The supply decline during that period was 0.1 percent. However, the anticipated decline in supply for this year is over 5 percent. That sounds a lot like speculation. Buy now on the expectation of higher prices in the future.

Low interest rates facilitates speculation in wheat. Suppose a speculator can take out a loan at 1 percent, buy a few tonnes of wheat at $200, stash them away in a warehouse and sell them six months later at $325. Does that not sound like a familiar wheeze? Here is a clue; think houses, dot.com companies, and currency futures.

Meanwhile, the rest of the world pays more for their food. Moreover, there is a kicker. The greater the amount of inflation, the greater the incentive for commodity dealers to speculate. More speculation means more hoarding, which in turn, creates more inflation. There is only one thing that can stop this cycle - higher interest rates.

For a liberal like Mr. Krugman, this is a very uncomfortable chain of events. He argued vociferously for lower rates. He believed that looser monetary policy would reduce the interest burden on US borrowers and prevent a further deterioration in US economic activity.

However, those low rates are now facilitating a speculative binge that is seriously hurting the world's most economically vulnerable people. At the risk of being excessively emotive, low interest rates may have protected debtors in the developed world, but at the cost of high food prices in the developed world. It is just one more miracle of Globalization

Input prices in the service sector rise sharply

The ONS have developed, on an experimental basis, a price series tracking services producer prices. As the name suggests, this series captures the cost pressures confronting firms in the service sector.

Recent movements in the series tell an interesting story. First, prior to the crisis, the service sector was facing mounting inflationary pressures. Second, once the crisis took hold, prices came crashing down. Third, in 2010 cost pressures have again emerged.

The services producer price inflation rate is far lower than that facing the manufacturing sector. There, the recent surge in energy and commodity prices has been a major driver of higher producer price inflation.

Nevertheless, the sudden reappearance of inflation in the service sector is further evidence that pricing pressures are building in the UK.

Germany - the beast is back

What is going on in Germany?

In the third quarter of last year, the German economy expanded 0.7 percent, and clocked up an annual growth rate of almost 4 percent. By recent historical standards, this was an impressive growth rate. In the previous 20 or so years, average quarterly growth was just 0.3 percent. So while the British economy shrinks, Germany is back on the steroids.

It does help to have a strong, competitive and innovative export sector. Sadly, the UK gave this away in the early 1980s, when Thatcher needlessly wrecked our manufacturing sector.

However, the surge in German growth raises a tricky question for the ECB. The eurozone economy has bifurcated. The centre seems to be hightailing it out of the recession. The periphery remains encased in a debilitating financial crisis. Moreover, eurozone inflation is picking up quickly.

Time for a rate hike? Recently printed German numbers say yes. Numbers coming out of the periphery say no.

Just what we need right now; an oil price bubble

The crisis in Egypt is doing wonders for the price of oil. As demonstrators filled the streets of Cairo, the price of Brent crude hit $100 a barrel, its highest level for two years.

However, it would be misleading to think that the political crises in North Africa is the main driver behind the recent spike in oil prices. The crisis has helped over the last month or so, but the market has been trending upwards since the summer.

Cheap money, lots of speculation and a growing expectations of inflation - these are the factors driving the price of oil higher.

The interest rate hike is on its way

A rate hike is looking more likely. Here is Martin Weale, the newest member of the Monetary Policy Committee, writing in the Guardian.

As we cast our votes at the January meeting of the Bank of England's monetary policy committee – ahead of last week's GDP figures – I saw a compelling case for an increase in the bank rate.

My concern is that, if businesses and pay-bargainers come to regard an inflation rate of 3%-4% as normal, it will become more costly for the MPC to keep inflation close to the government's 2% target.

The longer inflation stays above the target and the further it rises, the greater the risk that inflationary expectations will become built in.

A rate hike at the next MPC meeting looks very likely.