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14 May 2022

The Price of Eggs

Tag(s): Politics & Economics, Current Affairs, Foreign Affairs
For over a year now it’s been clear to me that the UK and indeed much of the rest of the world is facing a significant increase in the rate of inflation. I found it extraordinary that so many central banks particularly those of the United States and the UK have got matters wrong over this fact and indeed how they deal with it. Finally, the Bank of England has recently acknowledged that households face a record squeeze on living standards. Their recent economic forecasts are hideous. They have slashed their growth forecasts and are predicting that double-digit inflation will cripple consumer spending power and curtail corporate investment. Therefore, the economy is now forecast to contract by 0.25% in 2023 recovering just by the same percentage in 2024. But even this is disingenuous because even suggesting that there might be some slight growth in 2024 does not mean that the inflation has gone away. If oil prices and other energy prices and food prices and other vital parts of economy, all of which have increased very substantially, stay at these new high levels then it becomes almost irrelevant to talk about the rate of inflation but rather becomes right to talk about the cost of living and that is what indeed the general public and quite a number of politicians have been doing for some time. In reporting on the rate of inflation in the UK we tend to quote the CPI index and that has been increasing steadily for some considerable time and is now around 7% and is forecast to go as high as 10%, the highest rate of inflation in the UK since the 1970s and we all know the disasters that led to then with militant unions demanding huge pay rises and a general unease in the whole of society.

But the CPI does not include property prices. Quite a few commentators comment that the rates of inflation in US are higher than those in the UK as if to suggest this means we are managing a little bit better. This simply isn’t the case because the rate of inflation quoted in the US does include property. When we include property in the less used RPI we find that the rates are very similar. For me, the Bank of England has completely lost its way. It is now predicting headline inflation of 10%, five times its 2% target. But one thing I will say in its defence is that much of the pressure of inflation is coming from causes that the Bank of England can do very little about. In March last year crude oil was already $70 a barrel, an increase of 90% over the year before. Partly because of the pandemic labour costs were rising sharply across Asia and it would be clear to me at least that that would mean Chinese-sourced goods would inevitably arise in price, particularly since the pound has lost so much value during this period against the dollar.

Supply chain issues were worsening in many markets with shortages of semiconductors, electrical and mechanical equipment and other key components nearly all of which we have to import from China and even Russia. Steel prices more than doubled from 2020 to 2021. By May last year copper hit $10,000 a ton again more than doubling in a year and other key industrial metals like cobalt and nickel are also shooting up in price. With so many indications of extraordinary rates of price increases in these key commodities it seemed amazing that at this time Bank of England governor Andrew Bailey stated as recently as last September that “our view is price pressures will be transitory”. Some people in the UK want to blame all this on the war against Ukraine but that only began in February this year and all these price increases had already taken place and were already working their way through the markets.  A year ago, the United Nations FAO global food price index was up 40% on a year earlier long before the impact of shortages of grain and other food items from Ukraine and Russia take effect. In the past year, palm oil prices have soared and are continuing to rise. Colgate-Palmolive which uses a lot of this commodity expects its raw material costs to leap 22% this year from a forecast 13%. There will be some acceptance of lower margins both by manufacturers and retailers but still these increases are simply too large not to seek price increases either in real terms or by reducing the size of packs which amounts to the same thing.

And I haven’t even talked yet about utility bills. Before Putin invaded Ukraine household energy bills were already 30% higher than a year before. With the impact of the price cap, they’ve now risen 54% since April. In my own case I am halfway through a two-year fixed price deal, but I dread to think what is going to happen in 12 months’ time when new pricing comes through.

The cost-of-living crisis was already set in stone long before Russia invaded, The real economic cake has been stagnant for some time and is now getting smaller. While the very wealthy have been gaining a larger share of the cake, everyone else is therefore taking a smaller share. This can happen through job losses and wage cuts and declining incomes which is deflation, or it can happen through prices rising so much that things become unaffordable. That means most people will end up with less heating, fewer meals out, fewer car trips, and fewer or even no holidays. That is already happening to a large section of the British population. They have to choose between heating their home or eating a second meal of the day. Some are saying they don’t have the energy to cook their food and this crisis has been long in gestation. It is not down to the war in Ukraine, the pandemic, Brexit or even climate change and other global issues that are basically outside the control of national politicians who would like us to think that some of this is the case. The reality is that it is the result of poor economic and financial policies going back before the last global financial crisis of 2007 to 2009.

Much of this is down to the Federal Reserve in the United States. It’s not that they are any worse managed than other central banks, but the impact of their errors can be so much greater. They implemented policies that supported US financial markets and thereby promoted excessive leverage. The wealthy benefited from the short-term effects of this, but this was at the cost of declining economic growth. The markets have not been working efficiently in the way that they should and capital, because it’s so cheap, has flowed to loss-making ventures many of which will probably never be profitable but have been kept alive by ultralow interest rates at the expense of economic growth driven by the better run companies.

Central banks to an extraordinary level have used their own balance sheets to protect financial asset prices and suppress financial volatility. But stability breeds instability particularly when it has been artificially engineered by central-bank manipulation of the financial markets. The system is on a knife edge between extreme inflation and deflation. The excess of financial-asset valuations, leverage and debt have to be inflated away but that means that the prices of wages, goods and anything else has to catch up with those financially managed assets or the financial asset values themselves have to deflate. The bottom line is that most people are going to become poorer in real terms.

While the 2008 crisis destroyed demand (everyone had too much debt) while maintaining supply which was deflationary, the Covid-19 pandemic and ensuring lockdowns destroyed supply (businesses were shut and supply chains halted) while maintaining demand (as government paid wages). It has proved inflationary and therefore demands the opposite approach to that seen after 2008. It is likely that there will be some countries to come out of this reasonably well because their currencies will be revalued. I have seen one suggestion that it is the Australian, Singaporean and Canadian dollars, plus the Swiss Franc, the Norwegian krone and the Chilean peso that will appreciate. Four of these are commodity currencies Norway and Canada with oil, Australia and Chile with key metals while both Norway and Switzerland have vast reserves. Every Norwegian individual owns $243,000 in foreign assets while every Swiss owns $128,000. These two countries have made long term investments and shown wise use of their assets, both material and human. Singapore also has a healthy balance sheet (with net debt of zero and a triple-A credit rating)and a strong track record of controlling inflation. So it can be done.

Sources: various

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27 May 2022

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The Price of Eggs
14 May 2022

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30 April 2022

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5 February 2022

29 January 2022

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