What an inflation shock really looks like for the UK

The 80s are back in fashion. Top Gun has returned to the cinemas, Kate Bush is number one and inflation is at an all-time high since 1982. Global food security is at risk due to a conflict that’s ongoing.

Inflation in the UK was less than 1% at its peak in 2021. It’s now at 9%, which is a record for the country. This is a 40-year-high! The cost of living in America is 8.6% higher than it was a year ago. In the eurozone, costs are up an unprecedented 8.1%. Surprisingly, the cost to live is expected to rise even more in the coming months.

Who is to blame? The war in Ukraine has made matters worse. But it wasn’t Putin marching west that caused the rise in commodity prices or the cost of living crisis. After an unusually cold winter, and a surge in global demand for natural gas following the pandemic, energy prices began to rise over a year ago. The wind hasn’t produced as much power as we expected.

 

 

Labour shortages – Remember when lorry drivers looked like hen’s teeth? – more expensive fuel, higher transport and distribution costs for businesses. This includes the commodities industry. Guess who pays for it?

When you consider the fact that the Ukraine conflict has wiped out a large chunk of global wheat production and then add sanctions against Russia’s oil and gas, you get the hyperinflation we are currently experiencing. Even a peace agreement – which is still far off at the time this article was written – would be difficult to get through the system and lower prices.

“Commodity prices are currently disconnected from fundamentals. Commodity prices have a structurally driven cost of production and cyclically driven inventory levels. Morgan Stanley

According to the World Bank in March and April, food commodity prices reached a new record high. They are now 80% higher than they were two years ago, thanks to a 15% increase over the previous two months. As global wheat supplies fall again, it expects a 20% rise in food prices by 2023.

The Institute of Grocery Distribution recently predicted that food prices would rise 15% this summer. The huge reduction in wheat exports from Russia and Ukraine is pushing up grain prices. Watch out for the rise in bread and pasta prices. Everything that is fed on grains, such as chickens, will become significantly more expensive.

Even Morgan Stanley, a US investment bank that considers itself “below consensus on food price forecasts”, admits that the current high levels of inflation are not fully reflected by what consumers pay at the till. It warns that “the impacts will be felt in the next 12-18 months,” and adds that there is a risk of a domino effect of countries restricting food exports as India did with wheat.

The world’s central bank policymakers must now decide how aggressively they will raise interest rates to reduce inflation and avoid a global recession. It’s not an easy task. This one is best viewed through your fingers.


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