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UK inflation hits 30-year high

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers week ending 25 March 2022.

| 9 min read

The tragedy in Ukraine continues, with no end to the fighting in sight as Russia’s invasion entered its second month. Energy markets continued to be volatile against a backdrop of rising inflation in western markets, but western governments are continuing to source alternative supplies.

It was a calmer week in markets. The blue-chip FTSE 100 index was up 1.1% over the week by mid-session on Friday, with the more UK-focused FTSE 250 down 0.4%.

Ukraine

The European Council, NATO and the G7 all hold summits on Ukraine this weekend, with further sanctions against Russia expected to be announced.

On Thursday Biden told world leaders in Brussels the US would "respond" if Russia uses chemical or biological weapons in Ukraine. Russian forces appear to be digging in as the Ukrainian Army launch counterattacks to the northwest of Kyiv.

Ukraine's President Zelensky said Europe was "a little too late" to stop Russia's invasion, by not sanctioning Moscow and blocking the Nord Stream 2 gas pipeline earlier. He also pleaded for his country's entry into the European Union.

The Moscow Stock Exchange resumed trading in some shares on Thursday, after it was suspended for a month due to Russia's military operation in Ukraine. Trading renewed for only 33 of the largest companies that make up the ruble-denominated MOEX Russia Index, which saw gains of 10% at opening but closed 4.4% ahead. Short selling was banned, as was trading by foreign equity owners.

Economics

Inflation hit 6.2% in the 12 months to February – the fastest rate seen in 30 years. Gains were driven by rises in fuel, energy and food costs. Prices are rising faster than wages and the Bank of England thinks inflation could hit double digits later this year. Chancellor Rishi Sunak and Prime Minister Boris Johnson have been under pressure to do more to help struggling households. But the Chancellor’s Spring Statement has been criticised for not doing enough.

Inflation is the rate at which prices rise. If a bottle of milk costs £1 and that rises by 5p, then milk inflation is 5%. The pernicious impact of high inflation was seen in government borrowing data. UK government interest payments hit a fresh record of £8.2bn last month, the highest amount for a February since records began in April 1997 – and £1bn higher than the equivalent month last year. The payments are pegged to the Retail Prices Index (RPI) – which reached 7.8% in January.

Falls in alcohol and tobacco sales may have been linked to an increase in people attending pubs and restaurants.

UK retail sales fell 0.3% in February as online sales dropped and stormy weather kept some shoppers at home. This unexpected fall followed a 1.9% rise in January. Falls in alcohol and tobacco sales may have been linked to an increase in people attending pubs and restaurants, the Office for National Statistics said. Online sales volumes slid 4.8% month-on-month following strong growth in December and January.

High-street retail giant Next has warned it will need to increase prices even further later this year. The high-street stalwart said prices for homeware items will be increased 13% and fashion prices will rise 6.5% in the second half of 2022. This is an average of 8% overall. Government inflation data showed clothing and footwear prices rose 8.8% in the year to February.

Covid-19

The UK has now scrapped the legal obligation to self-isolate following a positive Coronavirus test, with the law withdrawn on 24 February. Official advice says those with positive results should stay at home for five days following a positive result, but this will not be enforced by law.

The Omicron variant of Covid-19 is still having a negative impact in Asia. Shanghai’s Covid cases jumped more than 60% in a single day, hitting a record 1,609 on Friday, even as authorities widened restrictions that have limited access to food and medical care with devastating consequences. Beijing is still implementing its draconian “Zero-Covid” strategy as it attempted to develop an mRNA vaccine. More stimulus is coming in China, but Beijing is wary of creating excess inflation as seen in the West.

Energy

Oil prices hit their highest level since 8 March on Wednesday before easing as it became clear that EU countries remain divided on whether to sanction Russian oil and gas directly, a move already taken by the US.

Russia is considering accepting Bitcoin as payment for its oil and gas exports. Head of Russia’s Energy Committee, Pavel Zavalny said "friendly" countries could be allowed to pay in the crypto-currency or in their local currencies. This followed a statement from Russian President Vladimir Putin that he wanted "unfriendly" countries to buy its gas with rubles. The moves are likely aimed at stabilising the ruble, which has fallen in value by about a fifth this year.

With energy independence now higher up the agenda following Russia’s invasion of Ukraine, Shell is reportedly reconsidering a recent decision to pull investment from a large new UK oil field. In December, Shell said the economic case and possible regulatory delays meant it was withdrawing from the Cambo oil field, 75 miles off the west coast of Shetland. At the time the price of crude oil was under $70 a barrel – but a higher oil price has changed the economics. Shell has not yet sold its interests in the field but has not confirmed the move. Shell also recently resubmitted an application to develop the Jackdaw North Sea gas field – off the east coast of Scotland – having had it turned down in October by environmental regulators.

Transport

The number of government-installed electric-vehicle (EV) charging points across the UK will increase ten-fold by 2030 to 300,000, the Department for Transport has announced. The move is part of the Government’s new Electric Vehicle Infrastructure Strategy. About £500m will be invested to install public charge points across the UK. Support will be focused on helping drivers without access to off-street parking, as well as on fast charging for longer journeys. The UK currently has 30,000 public electric vehicle charging points. Media reports also suggested that BP is on the verge of announcing a £1bn investment in new electric vehicle (EV) charge points across the country.

&O chief executive Peter Hebblethwaite said he knowingly broke the law but would make the same decision again if he had to.

P&O Ferries boss should resign over the no-notice sackings of 800 staff, transport secretary Grant Shapps said. The company prompted outrage with the summary dismissals of British workers without a consultation period, with the intention of replacing the seafarers with agency staff on average hourly rates of £5.50. P&O chief executive Peter Hebblethwaite said he knowingly broke the law but would make the same decision again if he had to. P&O is owned by Dubai-based DP World.

India's aviation regulator has placed the country's fleet of Boeing 737 planes under "enhanced surveillance" after a jet crashed in China. On Monday, a China Eastern Airlines Boeing 737-800 crashed in southern China with 132 people onboard. Chinese investigators have examined the cockpit voice recorder after one of its “black boxes” was found. It is not yet known what caused the disaster.

Food

The head of the UK's largest dairy Arla Foods warned that milk supplies could be under threat unless its farmers are paid more. Its managing director Ash Amirahmadi said costs are increasing at rates never seen before and farmers can no longer cover their expenses. “Because of the recent crisis, feed, fuel and fertiliser have rocketed and therefore cashflow on the farm is negative," he said.

Since Russia invaded Ukraine, shipping companies have avoided docking at St. Petersburg and, together with financial sanctions against Moscow, fertiliser exports from Russia, the world’s largest producer, have fallen sharply. Prices hit a record high. For example, according to data from Bloomberg's Green Markets North America Fertilizer Index, the price of the crucial resource is at a record high since the index started in 2002. It's now about $1,200 per short ton from around $600 a year ago. And compared to 2020, fertilizer prices have quadrupled, the data shows.

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UK inflation hits 30-year high

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