ALEX BRUMMER COMMENT: Oil stokes up inflation fears

The sudden run-up in inflation could quickly start to limit the Bank of England's policy options. The more than doubling of oil prices to $78-a-barrel in the last 12 months is the main factor behind the resurgence of the consumer prices from 1.1 per cent last month to 1.5 per cent in October.

In the same month last year petrol and oil prices fell by 6.1 per cent , this time around they slipped by just 0.7 per cent. As this paper has reported, motoring groups expect petrol price at the pump to rise by 2p to 110p a litre by the end of the year.

One thing is certain with the cost of petrol and transport: Big oil, like the energy utilities, are slow to deliver the benefits to consumers on the way down but very quick to raise prices on the way up.

oil

On the rise: Following the more than doubling of oil prices in the last 12 months, motoring groups expect petrol prices to rise by 2p by the end of the year

In much the same way as a weak dollar is one of the factors which has been driving the recovery in the oil price, so a weak pound, down by 25 per cent over the last two years, means that we paying more for all the commodities we import.

Oil and other commodity prices are also being driven up by speculators at a time when returns on financial assets, like government bonds, are disappointing because of quantitative easing and low official interest rates. That could quickly change along with rising inflationary expectations.

The markets clearly see some straws in the wind in the latest inflation data with the pound hitting a two-month high against the euro and closing up against the dollar at $1.68. The switch in direction was helped along by upbeat comments on the economy from Monetary Policy Committee member Andrew Sentance.

The assumption must be that the Bank, having printed £200billion of money, is close to taking the proverbial 'punch bowl' away.

The hope must be that the drunk that is the British economy, the last of the advanced nations out of recession, will be able to stand up on its own.

Grand gesture

Just when Cadbury was beginning to think there would be no challenger to Kraft's miserable offer for the company, up pops an elegant chap in a white tie with a proposal.

Unfortunately, details of the prospective alliance with familycontrolled Ferrero have only been shared with the Italian media so far. But as in many family firms, there are tensions. And the suggestion is the younger Ferreros wouldn't mind an opportunity to cash out.

What is astonishing is that until now Ferrero has not been among the names bandied around as prospective bidders or white knights to save Cadbury from Kraft. It is also worth noting that despite the many opportunities offered to Nestle and Hershey to formally rule themselves out they have kept their silence. Under the scheme outlined, Ferrero - maker of Nutella, Tic-Tacs, the rival Kinder egg and iconic gold wrapped hazelnut chocolates - would combine with financial investors to bring the two companies together.

Analysts were quick to see the Cadbury-Ferrero as credible unit in effect creating a high-growth European chocolate champion capable of challenging Mars-Wrigley and other players. Smaller than Cadbury, Ferrero is known best around the world for its elegant marketing. It has annual sales of £5.5billion, 18 factories and employs 21,600 people.

With the detail so fuzzy the market was taking the Ferrero proposition coolly although Cadbury shares edged up and at 785p are still way above the Kraft offer.

The big hope at Cadbury HQ in Uxbridge must be that the flicker of interest from an unexpected quarter might tempt bigger players into the battle. Then there could really be a seasonal spectacular.

Writing wills

A year after global banking came as close to meltdown as at anytime during the last century Labour, in its most important piece of legislation before leaving office, will today outline its proposals for banking reform in the Queen's Speech.

What has captured the imagination so far is the grandstanding proposal of City Minister Lord Paul Myners to introduce law which would allow government to abrogate bonus contracts.

Far more important than this, however, is the 'too big to fail debate'. The governor Mervyn King does not appear to have gained much traction for his proposal that utility banks and casino banks be separated in a reprise of Glass-Steagall.

What does have support, including that of the Federal Reserve chairman Ben Bernanke, is the idea of 'living wills' which would allow the investment banking arm of a universal bank to be shut down, without jeopardising the ability of the bank to keep the cash points topped up.

This together with some kind of transactions tax - aimed at cooling the use of exotic instruments - would be far more effective than 'dangerous dog' measures which interfere with contract law.

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