Jeremy Warner's Outlook: Houseless CPI cuts no ice with the unions

ATM charging; AstraZeneca/CAT
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The Independent Online

This year, dear worker, we, the management, have decided to set your annual pay increase according to the Government's chosen measure for inflation - the Consumer Price Index (CPI). This is the measure used by the Bank of England for inflation targeting purposes. The good news is that although the CPI rate of inflation is running at just 1.1 per cent, we've decided to set the annual increase at the targeted rate of 2 per cent, as this is where the Government would like inflationary expectations to be.

This year, dear worker, we, the management, have decided to set your annual pay increase according to the Government's chosen measure for inflation - the Consumer Price Index (CPI). This is the measure used by the Bank of England for inflation targeting purposes. The good news is that although the CPI rate of inflation is running at just 1.1 per cent, we've decided to set the annual increase at the targeted rate of 2 per cent, as this is where the Government would like inflationary expectations to be.

It will come as no surprise to learn that the standard union response to such a line of argument is "sod off". Indeed, according to the latest research from Incomes Data Services, both management and unions have continued, nearly a year after the introduction of the CPI, almost wholly to ignore the new measure as a pay bargaining tool. Nor do they use the Government's previous yardstick for inflation targeting, RPIX, which strips out the cost of mortgages.

Indeed, virtually every attempt by successive governments to introduce an inflation measure which casts a more favourable light on the performance of policymakers has fallen by the wayside. A similar fate befell the Tax and Price Index in the 1980s. The reality is that no one will ever use a low measure of inflation for pay bargaining purposes if there is a readily available higher one. Instead, the gold standard remains the Retail Price Index, currently standing at 3.1 per cent and soon likely to move to over 3.5 per cent, where it will stay for some while.

The reason is that unlike the CPI or RPIX, the RPI fully takes into account what for most people is the biggest cost of living of all, housing. In the RPI, the cost of mortgage interest payments, council taxes, household insurance and rising house prices, are given a weighting of more than one-fifth in the index's make-up. Under the CPI, these components account for precisely nothing. Some measure of the cost of housing (though not mortgage interest) may soon be introduced into the CPI, conveniently just as house prices start falling. Yet as long as mortgage payments and council taxes remain out, it won't make the index any more credible.

The CPI was introduced by the Chancellor as a sop to the europhiles after Britain was made to fail his five euro tests. Yet as an extraordinarily low measure of inflation, it suited his purpose in other ways too. The rate of growth in earnings is always greater than that of inflation, but under the present measure the two may lose all connection.

ATM charging

The number of automated teller machines (ATMs) that charge for a cash withdrawal is growing fast. From virtually none just five years ago when Barclays tried and failed to start charging the customers of other banks for using its cashpoints, they've grown to more than one in three, and jolly irritating they are too if you happen to be stuck at a motorway service station with no cash in your pocket. Where once there would be a friendly Halifax or NatWest cashpoint to serve you free of charge, there is now a suspicious, generally highly coloured box which will charge the price of a couple of Kit Kat chunkies for your hundred pounds of readies.

In the past six months alone, the number of fee-charging ATMs is up by 40 per cent. Judging by comments made yesterday by Cardpoint, one of a growing number of private operators, they are destined to rise even further over the months ahead. Of the 800 cashpoint sites Cardpoint bought in May from HBOS, abouthalf are destined for conversion to the fee-paying model. Thwarted by the public outcry over Barclays' attempt to start charging the customers of other banks, the big clearers have instead moved to sell or close down large chunks of their non-bank-branch ATM estates. While some have been getting out, others have been getting in. One of the largest operators of fee-charging cash machines, Hanco, was recently acquired by Royal Bank of Scotland.

There's no intention, most of them insist, of ever charging for ATMs based onsite, but the more remote ones have become too costly to operate "free of charge" and are of questionable use as a marketing tool. It makes more sense to sell them than to close them.

Just to get this in perspective, though fee-charging ATMs may now be 40 per cent of the total, they account for only 3 per cent of the value of cash withdrawn. Consumers are voting with their feet. Even so, the private operators seem to be highly profitable. On top of the fee charged to the customer, they also get a commission from the bank for handling the transaction.

Because of the location of many of these cashpoints, there is a suspicion that the already socially disadvantaged are paying the most. In any case, more than one in five of us has used a fee-charging machine in the past six months, presumably because we didn't have any other option. By stealth, the age of charging for cash withdrawals is already upon us. Meanwhile, the cost of withdrawing cash overseas seems to have reached almost usurious levels. This is because for the first time, banks are being forced to make transparent charges which they had previously hidden in the rate of exchange.

For the bank bashers of the Commons Treasury Committee, all this is like manna from heaven. The banks are shooting themselves in the foot by surreptitiously dismantling in the name of cost control a perfectly good, cooperative system which has served the customers of all banks extraordinarily well.

AstraZeneca/CAT

So much for the row about whether biotechs should be allowed to avoid pre-emption rights. Cambridge Antibody Technology (CAT), a leader in the use of human antibodies for drug development, yesterday announced plans to raise £75m by selling a 20 per cent stake to AstraZeneca. The deal requires approval by shareholders, but with AstraZeneca's buy-in price set at a decent, 30 per cent premium to Friday's closing stock market price, nobody is going to complain about the waiver of pre-emption rights required, especially as the buy-in coincides with the start of CAT's high court attempt to recover royalties on its anti-arthritis drug Humira. If CAT loses the case, the shares would undoubtedly fall, so Astra is taking quite a gamble on the outcome.

Biotechs have been lobbying hard to be exempted from rights which give existing shareholders first call on any substantial new issue of equity. But as this case demonstrates, provided what's being contemplated doesn't disadvantage them, there's no reason they would object. The rules are there to prevent managements from diluting equity capital to the disadvantage of existing investors, and there they should remain.

For CAT, the Astra deal represents an excellent opportunity which underpins the cost of its future research budget. True enough, CAT essentially becomes a part of the AstraZeneca research effort, but it keeps enough of the upside of any drug discovery to make the arrangement worthwhile. That's assuming the small print isn't as poorly drafted as it plainly was with Abbott over Humira. Nobody's got any quarrel with the quality of CAT's science, but in other respects, the company leaves a lot to be desired. Its big hope, an eye drug called Trabio, failed dismally, while the Humira court case shows that CAT is quite incapable of drafting a bulletproof contract.

AstraZeneca is paying a big premium but in return it gets access to a technology where in the past it has been weak. What's more, £75m is little more than small change to the likes of Astra. It has spent nearly twice as much on share buy-backs in the last month alone. AstraZeneca has suffered a series of setbacks at the hands of the US Food & Drug Administration, which seems constantly to be raising the bar on the conditions a drug must satisfy for safety and efficacy before it is allowed on the market. If the future lies with medicines customised to the individual's genetic code, rather than in catch-all blockbusters, then CAT is exactly the sort of company it needs to be associating with.

jeremy.warner@independent.co.uk

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