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The Numbers Don't Add Up, They Add Down

The Numbers Don't Add Up, They Add Down Morningstar

The Numbers Don't Add Up

This has been the week when the European Union had to take a stiff dose of reality. Likewise, the europhiles and euro skeptics in the House of Commons.

First realist to emerge was Prime Minister David Cameron, who was caught between the proverbial rock and a hard place. As he perfectly well knew, he could not accept a deal that risked damaging the City of London as a world financial centre because he could not have got his own party to accept it.

There are few greater ignominies for a prime minister than to have to rely on opposition votes in the House of Commons. The EU proposals would have provoked another upsurge in demands for a referendum and this time the clamor might have proved too great to resist. Like his predecessors, Cameron dare not hold a referendum because he knows the vote would go the 'wrong' way.

In any case, a referendum on Europe would be too much for the Liberal Democrats to stomach, however desperate they are to avoid a general election. As it is, they can soldier on knowing that they have plenty to gain and very little to lose if an election can be put off until things start to pick up.

I think the Lib-Dems, despite coming third, have most to be satisfied within the Feltham and Heston by-election. They actually held off a challenge from the UK Independence party at a time when the anti-EU protest vote could really have made its presence felt.

There is no joy for those who want us out. The three main parties are all committed to the European Union and quitting is not an option. Last weekend is probably the nearest we will come to it.

While an uneasy truce reigns in Westminster, the European reaction to Cameron's veto has been almost as muted as that of the Lib-Dems. Despite the routine recriminations, the other nations know perfectly well that they cannot manage without U.K. contributions to the EU Budget. Throwing us out would knock a sizeable hole in the finances; cost savings would be minimal.

The outcome will be that everyone will go off and lick their wounds until next year. Given that the euro crisis remains unsolved, it will all flair up again in due course. Life in the New Year will be much the same as in the old one.

The Numbers Do Add Down

Inflation figures are at last moving in the right direction with a secondly monthly fall. Such is the persistence of inflation that neither fall has been much to rejoice over, leaving consumer price inflation still uncomfortably high at 4.8% and the retail price index stuck above 5%.

I have warned on many occasions over the past four years that inflation would not fall rapidly in accordance with the wishes of Bank of England governor Sir Mervyn King but at last I feel that inflation really has peaked.

We have the increase in VAT last January due to drop out of the calculation soon. More immediately, the price of petrol has eased a copper or two, something that is already contributing to an easing of transport costs.

Inflation will not, though, have fallen much further by the time the December figures are released next month. Energy prices are soaring, while price cuts by retailers that used to greet the aftermath of Christmas have already been made. It is worth noting that the November improvement in CPI and RPI would have been even more disappointing had shop wars not broken out so early.

Incidentally, shareholders in retail stocks should note that the Christmas panic hits the High Street earlier every year. We shall see the day when shops in town centers are replaced by housing developments.

The Bank of England continues its customary optimism by predicting that CPI inflation will be below target by the middle of next year. Do not assume that below target means below 2%, although that strictly speaking is the target. It is just possible that we will be back below the 3% ceiling by the middle of next year and no doubt that will be hailed as a triumph by King.

What it actually means is that inflation will be double the increase in average wages for at least another couple of months and will stay above wage rises for another year, even if you believe the official calculation that average wage increases are running above 2%, which I very much doubt. Most people think themselves lucky if they are earning as much as they did last year, or the year before that.

Shares Still Add Up

Let us not end the year on a downbeat note. Shares continue to represent the best investment value and yet another dip in the FTSE 100 index below 5,400 points has been greeted with a bounce back. Those who follow the mantra of buying dividend yielding shares on the dips are being well rewarded.

As the Brussels summit fell apart, the UK was threatened with being thrown out of the European Union and the coalition government came under colossal strain, it was good to see that one newspaper maintained a sense of proportion: the Daily Mirror led its front page on a report that a talent show panelist had spent £30,000 on a hair transplant.

So keep it all in perspective: you are reading this column; they are watching XFactor.

I wish you all a Happy Christmas and a realistic New Year.

This article was written by Rodney Hobson and originally published on Morningstar under the title: The Numbers Don't Add Up, They Add Down.

Tags: asset price bubbles , banking , David Cameron , EU , eu budget , European Central Bank , eurozone , financial crisis , liberal democrats , sovereign debt , UK , veto
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