Inflation - down but not out

Alex Brummer12 April 2012

HAWKS on the Monetary Policy Committee will find little support for an early rise in base rates in the latest inflation figures. On the contrary.

Despite the tougher tone of the May 'Inflation Report', price rises are the most benign for more than a quarter of a century. That was good enough to drive the pound up to $1.49.

The underlying rate of inflation is down to 1.8%, well below April's 2.3% and the 2% expected. More significantly, it is way below the 2.5% government target.

Of course, we know there are voices inside the Bank warning about the 'unsustainable' rate of growth of house prices. But, even though the MPC is looking at a two-year time horizon, it may find it difficult to justify a shot across the bows of the housing market at this time.

Nor does it seem the right time to raise rates in terms of financial stability. Share prices remain nervy, despite the Monday rally on Wall Street, and there must be fears that raising rates too early on either side of the Atlantic could drive equities down and cause difficulties to heavily-indebted companies and the insurance sector.

The headline inflation rate shows just how good Britain's inflation performance is. Overall, prices rose just 1.1% in May from 1.5% in April. If the European harmonised measure of prices is used, prices in the UK climbed just 0.8% last month against 2.2% across Europe.

Britain is not alone in reporting lower inflation. In euroland, prices rose 2% in May, down from 2.4% the previous month, and right on the European Central Bank's ceiling. In the US, there was no rise on the month at all, which means prices there are increasing just 1.6% year-on-year. All this suggests that expectations that central banks across the world would move rapidly to raise interest rates are being postponed. The effect on the foreign exchanges was to give the euro a fresh lift to 95 US cents after a couple of days in the doldrums. It also dragged the pound up against a weakening dollar.

Does all this mean that the ghost of inflation has been vanquished? The monetarist tendency would say not. The lengthy period of low interest rates has led to rapid credit creation. The history of money shows that, when the pumps have been primed on the scale they have over the last year, the inevitable result is higher prices.

So no one will be prepared to say that the dragon has been slain just yet.

Drug futures
IN these times of turmoil on financial markets, shares in our pharmaceutical companies ought to be a safe haven. After all, illness will be with us always and the NHS is being enriched and may find itself better able to dispense the more expensive compounds.

Despite this, pharmaceuticals have underperformed the All Share Index by close to 20% over the last year.

Among the big worries for the sector is the lack of immediate blockbuster drugs.

Research by Datamonitor shows that, for five global groups with R&D budgets of more than $1bn, the late stage development pipeline is virtually empty.

This is among the reasons there has been so much speculation that GlaxoSmithKline might seek to plug its gap by absorbing America's Bristol-Myers Squibb.

All is not hopeless. Datamonitor found that, over the longer haul - the period to 2008 - there are 18 blockbusters in the pipeline with potential revenues of $24bn.

Anglo-Swedish AstraZeneca appears among the best placed with three blockbusters with an estimated value of $7.2bn and the ability to continue its dominance of the heart drugs market.

These forecasts have to be treated warily because of the unpredictability of approvals.

As Bayer found to its cost with its anti-cholesterol agent, Baycol, you can bring drugs to the brink but, if there are nasty side-effects, you are back to square one.

It would be nice, as former Glaxo boss Sir Richard Sykes has pointed out, if R&D in UK labs did produce the best drugs. But, as Datamonitor's Neal Hansen notes, the game is changing.

Whereas AstraZeneca may have the blockbuster pipeline, GSK has the blockbuster testing and distribution system and a better ability to bring compounds to the market than anyone else.

It can buy up smaller rivals, or alternatively partner less powerful players such as Bayer, as it is doing with the launch of potency drug Vardenafil, which will take on Viagra.

The really big bucks will continue to come from home-grown compounds such as AstraZeneca's Crestor. But this may not be the only route to success for the drug giants.

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