Jeremy Warner's Outlook: Sykes puts motherhood and apple pie on menu

Inflationary Britain; Barclays/Cazenove
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The Independent Online

The Tomorrow's Company report on restoring trust in stock market investment promised much but perhaps predictably has delivered nothing beyond platitudes and a rehashing of obvious motherhood and apple pie principles.

The Tomorrow's Company report on restoring trust in stock market investment promised much but perhaps predictably has delivered nothing beyond platitudes and a rehashing of obvious motherhood and apple pie principles.

Those that can bring themselves to read yet another long and turgid tome on the supposed failings of Britain's investment system will find little to disagree with in this anodyne collection of recycled proposals. I'm pleased to report that Sir Richard Sykes and his team have even taken on board The Independent money section's long-running campaign to have basic finance made compulsory in the school curriculum.

Yet I shouldn't let cynicism run away with me. The report is well intentioned enough and there is no obvious harm in attempting to set the world to rights. But the sheer ambition and scope of this exercise makes it seem overly worthy and insubstantial. This is Life, the Universe and Everything all rolled into one. Much of it is meaningless twaddle. Other parts are a statement of principle that most investment institutions already apply, while still others are utopian nonsense which has little place in a free society. Nor is there any obvious way in which such a grand and diverse array of principles could be imposed on a financial services industry as many faceted and strongly competitive as our own.

Reading this report reminds me of a take-off I once saw of How!, a TV programme when I was a child which in patronising terms attempted to instruct the young on how to carry out basic tasks and calculations. The satirical version began with the immortal line, "This week, children, we are going to teach you how to cure the world of all known diseases".

But hold on a moment. What's this? In the section headed "Acquisitions and Mergers" the report asserts that research findings show 83 per cent of mergers and takeovers made by large publicly quoted companies had failed to produce any benefits and over a half had actually destroyed value. "Growth for growth's sake via takeovers has been a prime cause of shareholder value destruction", the report contends.

On this issue at least, Sir Richard speaks with real knowledge. While at Glaxo, he was responsible for two huge consolidating mergers, the second of which with SmithKline Beecham has yet to create any value at all. Sir Richard isn't the sort for blinding flashes on the road to Damascus, so we can safely assume he excepts himself from the generalisation.

Inflationary Britain

A rising inflation rate is not usually welcome news to anyone, but the announcement yesterday that it rose from 1.2 per cent to 1.5 per cent last month must have been manna from heaven for the Bank of England, which has been wrestling with the public relations nightmare of having to raise interest rates even though the official rate of inflation as measured by the consumer price index has been falling.

Regrettably, the Bank's discomfort may not be entirely over yet. Virtually all the rise in the inflation rate was caused by higher oil prices, which are now falling again. The upshot is that the inflation rate may again begin to taper off over coming months. At just 1.5 per cent, inflation is in any case still way below target and substantially below that of both the US and the eurozone, where interest rates are much lower.

In adjusting policy, the Bank of England asks us to look at inflation not as it is now, but where it will be in two years time. With the economy expected to grow above trend both this year and next, prices would soon be heading decisively higher if left to their own devices. As it happens, the Bank has been reasonably successful in explaining these complexities in policy, but its position isn't helped by the consumer price index, which almost everyone outside the Government now thinks of as a highly questionable measure of inflation. Its adoption last year was little short of a conspiracy to mislead the public.

Unlike the CPI, the old inflation measures took account of both council taxes and the marginal cost of house price inflation. Under the retail price index, the headline rate of inflation is ticking along at a much more credible 2.8 per cent. Even the old targeted measure of RPIX is at 2.3 per cent.

Yet in my view even these measures understate the true state of inflation in the UK economy. The Office for National Statistics goes to great lengths to ensure that all the indices properly reflect people's spending habits and, it insists, they are a true reflection of the average increase in the cost of living. Unfortunately, very few of us believe them to be such. This is partly because there is a natural psychological tendency to notice the goods and services which are strongly inflating in price while ignoring the ones that are deflating or going nowhere. We often fail to see, particularly with services, that we may be getting more for our money than we used to.

There is also the danger of too London-centric a view of the world. According to a recent survey, London has become the second most expensive capital in the world behind Tokyo. That's partly because of the strength of sterling, which has made Britain as a whole more expensive for foreigners, but it also reflects extraordinarily high rates of inflation for almost everything that Londoners like to do, from going out to having a haircut to buying a house. The proliferation of traffic restrictions, which in essence are just a way for local authorities to collect more tax, adds to the impression of a city where inflation is out of control.

Yet even ignoring London, it's hard to find anyone whose cost of living is reflected accurately in the official statistics. This creates a growing credibility gap in policy, made all the more bewildering by the Bank of England's insistence that house price inflation isn't a factor in interest rate decisions except in so far as it might influence aggregate demand. We all know that not to be true. The Governor's CBI speech this week, in which he gave his most overt warning yet on the dangers of the overheated housing market, only served to confirm the point.

The price of many durable goods is said to be falling, yet some of these goods, notably TV sets, are now so durable that they could just as easily be classified as assets. Meanwhile the cost of services, which as society ages take up a growing proportion of our money, is inflating like topsy.

The truth is that no thanks to the statistics the Bank is probably getting its policy response about right. Underlying inflation is for many of us already a good deal higher than the numbers suggest. Or that's the perception, anyway, and perception in my experience is a better guide to reality than statistics can ever be.

Barclays/Cazenove

The top brass at Barclays must have been more than a little miffed to see comments about the bank supposedly made by a senior Cazenove executive in last weekend's press. Commenting on the story that Barclays is interested in buying Cazenove, the unnamed executive was reported as saying that it wasn't at all clear what Barclays could offer Cazenove. Wading yet further into the mire, he went on: "They are not a tempting owner. The view here is that they are a takeover target. We wouldn't want to become a part of Barclays and find ourselves answering to Bank of America."

Oh dear. Was the executive aware that Cazenove is in fact Barclays' primary corporate broker? I guess not. In usual circumstances, such indiscretion would be regarded as a sacking offence, yet if Barclays is serious about wooing Cazenove, then it could scarcely do that. At the right price, Cazenove would make a useful bolt-on acquisition for Barclays, but having made a huge success out of Barclays Capital without the heavy costs associated with equity distribution, the bank is not about to get so lovestruck as to overpay. Despite its iconic name, Cazenove is a quite small business. Passion will have been further cooled by these extraordinary remarks, which are not at all the sort of thing one is supposed to say about one's client.

jeremy.warner@independent.co.uk

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