Investment Management Blog - Montague Capital

For a better understanding of where inflation is going and what the Bank of England may chose to do about it, the wholesale gas market is a worthwhile subject for observation.  British Gas’ CY08Q2 results revealed that the price it has been paid for its gas supplies to final distributors has fallen 15% over the last quarter.  Note that the drop happened before the recent slide in the oil price.  There is a point to the argument that suggests that the prices of oil and gas should no longer move in lock-step with each other.  Several new major sources of gas under development (e.g. fields in Qatar) produce no oil at all, so why should their production price be influenced by oil?  But the crucial point here is that, if the wholesale price of gas is now heading down, how can end consumers not see the benefit of that drop?  Perhaps being too cynical, the answer will be along the following lines.  The end-distributors still have to cover supply price rises seen earlier in the year and they will also assume responsibility to “protect” us from future volatility if the price of oil – sorry, gas – refuses to continue with its recent weakness.  After initial hints a couple of months back that this year’s gas price increases would come in two phases – one during the summer when we’re all in too much of a holiday mood to notice, then another in December when we can’t do a damn thing about it – Centrica’s recent warning of the £1,000 household gas bill has racked up the pressure.  The main plank of the “hands-off” approach to fighting inflation is that manufacturers lose pricing power and consumers see their disposable income shrink.  In the case of gas, only the latter is true.  To start to believe that inflation can be beaten without the need for rates to rise, we need to see the price of one important factor in the equation go down.  Gas would be a good start.