The Chancellor's optimistic view looks flawed

"Caught in the crossfire between manufacturers forcing up prices and consumers who can't and won't pay, retailers have taken it on the nose"

Since the beginning of 1994 the British economy has been subjected to two price shocks. Firstly, there was the big rise in commodity prices. Then there was the sudden swoon in sterling in the first half of 1995. The key question is what this will do to prices in the shops and the rate of inflation targeted by the Government.

The markets staged a mini-swoon themselves yesterday on the disappointing figures on both input and output producer price inflation. The hope had been that the recent easing in commodity prices would feed through to the prices paid by manufacturers. In the event, the effects of sterling weakness prevailed.

There was even more disheartening news on factory gate inflation. With output flat and evidence that unwanted inventories were accumulating, core output inflation was expected to fall back. Exactly the opposite is occurring - manufacturers are pushing through much bigger price increases than had been expected.

The persistence of input price inflation and the ability of manufacturers to pass higher costs on to their customers cast an inevitable shadow over the prospects for retail price inflation. Even before these latest producer price figures, headline inflation was expected to rise to 3.7 per cent and the underlying rate to 3 per cent. Retailers, it was thought, could not repeat the deep discounts they staged in last summer's sales.

Such behaviour on the part of retailers has formed an important part in keeping retail price inflation down over the past two and a half years. A considerable part of the effect of higher cost inflation has been mitigated so far by a compression of retailers' margins. Caught in the crossfire between manufacturers forcing up prices and consumers who can't and won't pay, retailers have taken it on the nose.

This Thursday's release of retail price inflation will reveal whether the Government can continue to rely upon a highly competitive high street to help it out of a tight corner. The signs are, however, that the Chancellor's optimistic view of the inflation outlook is flawed. Eddie George's warnings look less like crying wolf than they have.

Travel companies get it wrong again

While the rest of the country basks in the heat wave, holiday companies seem to have created a little rain cloud all of their own to douse their fortunes with. Everyone knew that this summer's blistering weather must be crucifying the holiday companies, who rely for their business largely on the British people's love affair with the sun. Yesterday's profits warning from Airtours was official confirmation. With a long hot summer, and the continued absence of the feel-good factor, many holidaymakers have chosen Devon in preference to Corfu. But it is not just the weather; as has happened so often in the past, the tour operators simply overestimated the number of holidays people would want to buy.

The travel sector has long been plagued with a boom-bust cycle that boosts profits on the way up only to lay companies low on the way down. Think of Court Line, Horizon and International Leisure Group, the Intasun operator run by Harry Goodman, which went belly up in 1991.

Airtours is no ILG. It has a much stronger balance sheet. But the fact remains that the travel industry has called the market wrong yet again. A forecast of a 5 per cent rise in capacity has failed to materialise, resulting in loads of holidays on offer with discounts on their discounts.

It is ironic that it should be Airtours that is the first travel group of the summer to wilt. The company was making bold claims earlier this year that it had the market taped. The theory was that with better systems, economies of scale and the acquisition of less cyclical overseas companies, it might avoid the pitfalls that have caused the spectacular collapses of the past.

Britain's obsession with last-minute deals is part of the problem. Every airline seat or hotel room left empty is money off the bottom line. Margins are so thin that an aircraft has to sell every seat to make the trip pay.

In fairness, much has changed from the old days when even sizeable travel companies would succumb to deep discounts the moment the market turned down. Systems are genuinely more sophisticated and the largest travel groups have been buying overseas companies to ensure they are less reliant on the bargain-hunting UK market. But yesterday's announcement shows that even the big boys have yet to shake off the ghosts of the past.

Changes needed to deal with insider trading

Britain's record in detecting, prosecuting and punishing insider traders isn't much worse than anyone else's. That is not saying much, however; something plainly needs to be done to make it better. Though we have tough and specific insider trading law, it does not seem to be acting as much of a deterrent. It is therefore little surprise that the authorities should be seeking ways of making it easier to bring offenders to book, even if this means less severe punishments. The time has gone when the Crown Prosecution Service felt it had to have a go at everything, and that only a full-blown criminal trial could do the offence justice. Instead, there is an increasing tendency to let the front-line City regulators play their hand, challenging firms and individuals on the strength of their own rule books. The burden of proof in these civil procedures is much lower, which means that the chances of conviction are considerably higher.

Swiss Bank Corporation appears to be a case in point. The Department of Trade and Industry, the only authority with the powers to investigate and prosecute insider dealing, has decided not to proceed to a court case against SBC over its controversial dealings in electricity shares while advising Trafalgar House in its attempted takeover of Northern Electric earlier this year. Instead, it has handed the case back to the Securities and Futures Authority, the City investment banking watchdog, which is looking to censure SBC for an alleged breach of rules. Being a civil rather than a criminal procedure, it should facilitate the process of making an example out of SBC.The front-line regulators such as the SFA have been calling for some time for greater support in pursuing alleged wrong- doers outside the criminal courts, both on insider trading and market manipulation, threatening them with sizeable fines, bans and negative publicity. Shifting a growing number of cases their way, even potentially important ones like SBC, is part of this process.

But it does not overcome the narrow limits imposed by the current legislation on what the front-line regulators can do. Investigative and prosecution powers on insider dealing are the sole preserve of the DTI. A real shift in practice will need legislation. The Labour Party has hinted at it but it cannot but help be low on any new government's list of priorities. These are not changes to be expected in the foreseeable future.

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