Price increases 2016 - 2017

[Lordship 516]

PRICES

Prices are expected to increase, even in the short term. The first effects will be felt in the food sector where about 46% of the food supply to the UK is imported. Even locally produced food will increase as farmers are sensitive to prices from elsewhere in the world & the UK export about ?12bn of food products. There is sufficient data to evaluate this effect from examining the causes of the price spikes that occurred in 2008. Already the devaluation of the ? is affecting the pricing of rape seed products & wheat for animal feed [already up about 3% with more upward pricing pressures expected due to low harvest yield because of bad weather] that will result in increased cost pressures on egg/dairy/meat products [uK is 86%/86%/84% self sufficient in these sectors] in the short/medium term. Feed constitutes about 60% of costs of production.

The UK food, drink & catering market accounts for over 50% of all retail sales and amounts to ?198 billion in 2016 - food accounted for ?94billion of this figure, approximately 25% of all retail spending & 11% of all income. The poorest 10% of UK households spend 15% of their expenditure on food, a figure that is just 7% for the richest 10%. This is because low income consumers spend proportionately more on meat, milk, eggs and bread ? staples that will be hard hit by food price rises.

Any increase in food prices will directly affect other retail sales as people only have so much disposable income in their pocket and food will be a priority as will paying their unavoidable costs such as mortgage/rent/co. tax, transport & utilities costs. I expect food costs to increase by about 7% in the short term & other grocery sales to increase by a similar amount which will reduce other retail sales by about ?14billion & possibly more as people will become increasingly careful in their spending habits due to uncertainty. People might be expected to cut back on drink & catering spending but not on food. For Christmas expect a lot of bargains/sales but for the new year expect an increase in unemployment/liquidations. Energy prices must also be expected to increase as the wholesale cost of energy makes up approx 45% of the cost & is normally priced in $ terms - so expect an increase of about 5% in energy costs soon.

Price increases will trickle down to all sectors of the market once the trend in the value of the ? stabilizes & manufacturers/retailers work their way through existing stock & current forward purchases. Competition in a weak market may cause a temporary reduction in margins & retailers holding/reducing prices but this cannot be held indefinitely. Expect price increases for food to bite in the short term [before the year end] & for other products early in the new year 2017.

[Henry_17]

Lordship,

1. Surprised at only 3% on feed, with the sterling weakness we've had doesn't that imply a decrease in underlying $ prices?

2. So c?100bn of spending is on non-food, this is booze and eating out? or what else? Surely this will be the first pool from which the ?14bn additional spending on food can be funded, implying the impact on other areas of retail sales may not be too severe... what was the '08 experience here?

3. With all this price inflation expected, we will surely we see the MPC to stick to the letter of their mandate and enter an aggressive hiking cycle?!

4. Most importantly, how much do you expect the price of a bacon sandwich to increase?

[Lordship 516]

Henry_17

1. "Surprised at only 3% on feed, with the sterling weakness we've had doesn't that imply a decrease [LS 516 - increase ??] in underlying $ prices?"

Animal feed is a blend of open forage for 5/6 months & winter feed supplements which in turn is a blend of farm produced food [silage, hay etc] & provender meals]; also animal feed decreased in price over the last six months or so but this year could see prices increase from October onward [expected] when harvest yields will become better known - this could lead to more increases for winter feed. Nitrogen fertilizer prices have reduced considerably as they use natural gas as their feedstock - this, along with reduced costs of diesel, has helped to keep the production costs of hay & silage down.

2. "So c?100bn of spending is on non-food, this is booze and eating out? or what else? Surely this will be the first pool from which the ?14bn additional spending on food can be funded, implying the impact on other areas of retail sales may not be too severe... what was the '08 experience here?"

I had already alluded to that - " People might be expected to cut back on drink & catering spending but not on food."

This is all drinks & catering plus other 'grocery' items [household consumables, loo paper, detergents, personal care etc.]. This can be the first pool for cutting back but the experience is that people cut back very little or for a limited time [resignation & management fatigue sets in] or drop down to a cheaper price point [own brand, budget brands as in Aldi, Lidl & Poundland]. If you remember back to 2008/2009 you will see that the retail markets were devastated with several household names failing in the aftermath of the financial crash & the BoE was slow to react. Most consumers stopped buying except for essentials & this didn't change until 2011/2012; they also reduced their credit card balances whenever they could but personal indebtedness, whereas not as high as in 2008 [150% of disposable income] is again at an all time high in cash terms [132% of current disposable income] & is only barely serviceable due to advantageous rates of interest. Highly indebted households are particularly vulnerable to unexpected events that increase the burden of servicing existing debts, such as an increase in interest rates or a fall in incomes. Vulnerable households may cut back sharply on other spending in order to continue servicing their debts, with negative implications for economic activity. Alternatively, weaker households may default on their debts. Memories are short, very short.

In 2007/2008 on the global markets, saw the wheat price rise 130%, soya by 87% and rice jumped 74%. Since that UK shopping costs have risen sharply. These price rises on the global commodities markets had a rapid and significant impact for all EU consumers. This time around this hasn't shown any sign in global commodity price rises but with warmer wetter winters forecast alongside drier summers, increases in the range and types of UK pests, diseases and weeds are likely to significantly change and there could also be more problems with pesticide resistance. Higher temperatures could lead to an increased number of generations per year, which allows time for resistance build up, and warmer winters could improve survival in resistant pest populations - this has implications for production of winter cereals & other early crops. Currently the UK produces less than 25% of its requirement for fruit & vegetables so the price rises of this category could also be higher in the short term.

3. "With all this price inflation expected, we will surely we see the MPC to stick to the letter of their mandate and enter an aggressive hiking cycle?!"

The BoE is between a rock & a hard place - either stabilize inflation & risk a certain fall in growth below 0% & increased unemployment or accept a period of heightened inflation in the interests of going for growth & maintaining employment. The government will have a part to play in making this call as the mandate may have to be modified in the short term. There is only one investor that can stimulate the economy in the circumstances we find ourselves in - the government & they will take some time to gear up so there will be an interim lag in the economy, say, two years of tough times.

4. "Most importantly, how much do you expect the price of a bacon sandwich to increase?"

The UK is only 56% self sufficient in pigmeat but export much of the cheaper cuts [belly & shoulder] & import a lot of bacon & ham that mainly comes from Denmark & Ireland. So you can expect your bacon to increase by at least 8.5% at the current rate of exchange, say 18p per normal 250 gm medium sliced back bacon. The UK produces 100% of normal bread flour but this is subject to international commodity pricing pressures so you can expect a price increase in bread also, say by 10p per normal 800g sliced loaf. So your ordinary common or garden variety of bacon sarney can be expected to increase by about 8P not including increased labour costs.

With all the posh variations on here, the poor old bacon sarney is likely to inflate beyond the normal mouths capacity to consume it !

[????]

No mention of CAP? Seems a big gap in your analysis

My understanding is that the trade tariffs the EU impose of food stuff (largely to protect French farmers) artificially inflates food prices by between 15-30%; so in the medium to long term Brexit could well reduce food prices to a true market level for foodstuff. well below the 7% short term spike in inflation....

[uncleglen]

I can't wait to get a nice bit of reasonably priced fish either.

[rendelharris]

uncleglen Wrote:

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> I can't wait to get a nice bit of reasonably

> priced fish either.

Good luck with that.

http://www.dailymail.co.uk/news/article-3684024/Sterlings-fall-batter-UKs-fish-chips.html

[JoeLeg]

uncleglen Wrote:

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> I can't wait to get a nice bit of reasonably

> priced fish either.

While I'd love to as well, I'd point out two things.

Firstly it all depends on what you class as 'reasonable', and of course that's related to quality. There's a lot of crap imported from outside the EU in supermarkets these days, with prices that frankly reflect the standard of product.

Secondly, fish prices aren't going to stop noticeably. They just aren't. If you doubt that go and have a chat with Jason over at Sopers in Nunhead. Ask him about price vs quality, and what he thinks the fish market in the UK might look like after Brexit. I suspect (mainly because I've already had this conversation with him) that what you'll hear will be a prediction that it'll help employment in the fishing industry (I admit, a good thing), but don't be expecting to see meaningful price drops.

Fish is expensive now, and Brexit has very little to do with the reasons why.

[DulwichFox]

Monkfish now costs a fortune.. Pound for pound there is a lot of waste....

But at one time Monkfish was cheap.. You could not give it away. It has a HUGE head that does not appeal to most people.

Monkfish tail was sometimes illegally used and sold as scampi in the United Kingdom in the past[2] contravening the Fish Labelling (Amendment) England Regulation 2005 and Schedule 1 of the Food Labelling Regulations 1996.

Fish and chips is still a relatively cheap meal to take away.. but was a poor mans food back in the 50's.

Lamb shanks were once thrown away or available Free for the dog..

They are now pricey.. because it is a trendy high end restaurant food.

Caviar was once peasant food. but now it is a luxury.

Good nurishing bread was readily available and was cheap.. now it is called artisan bread costs a fortune.

Same as craft beer...

DulwichFox

[rendelharris]

DulwichFox Wrote:

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> Caviar was once peasant food. but now it is a

> luxury.

Edward II made the sturgeon a Royal Fish in 1324, since when the royal family have had first dibs on all found in British waters. I know you go back a long way Foxy, but still...

[????]

see also oysters

[Jeremy]

I guess you'd class oysters as a luxury, but at a couple of quid each, it's an affordable one from time to time.

"craft beer"... you are confusing with ale.

[Lordship 516]

???? Wrote:

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> No mention of CAP? Seems a big gap in your

> analysis

>

> My understanding is that the trade tariffs the EU

> impose of food stuff (largely to protect French

> farmers) artificially inflates food prices by

> between 15-30%; so in the medium to long term

> Brexit could well reduce food prices to a true

> market level for foodstuff. well below the 7%

> short term spike in inflation....

I have only addressed the issue of short to medium term [next two years] price inflation due to currency devaluation & normal expected variations [such as seasonal] - the various rates [5% to 8.5%] I have suggested are at the current level of the ? & might further increase if the ? devalues further which I expect it to do over the coming months.

Agricultureal prices are unlikely to come down even after Brexit as the UK government are unlikely to dismantle the various protections & subsidies for UK farmers/fishermen. If they do, UK farming/fishermen/processing will suffer & food security in terms of supply & standards will be put at risk.

The effects of CAP are somewhat overstated. In practice with Most Favoured Nation (MFN), Generalised System of Preferences (GSP) & GSP+ which targets vulnerable countries, reduce the impact considerably. Least Developed Countries can export all agricultural products duty free and quota free. Other developing countries have signed free trade agreements with the EU that also provide preferential access (Mediterranean countries, Chile, Colombia, Mexico, Peru, South Africa). African, Caribbean and Pacific countries benefited from the non-reciprocal preferential access arrangements under the Cotonou Agreement. These arrangements had larger product coverage than the GSP scheme and a zero or minimal tariff for many products. Special protocols for sugar, beef and bananas attached to the Cotonou Agreement allowed virtually duty-free access for specific quantities which thus benefited from the higher internal EU prices for these products. Since 1 January 2008, the EU has extended duty-free and quota-free access similar to the EBA scheme to those ACP countries which have signed interim Economic Partnership Agreements. GSP+ preferences are generous depending on the composition of a country?s exports, as the contrasting experiences of Bolivia and Ecuador show. Bolivia faces a trade-weighted average tariff of only 0.5% and 90% of its exports to the EU enter duty-free. Ecuador, on the other hand, faces a tariff of 15.7%, the highest of any country including developed countries shown in the table, and only 38% of its agri-food exports enter the EU duty-free.

The overall effect for UK consumers has also been overstated by some commentators who for their own reasons state that the effect on consumers in the lowest 20% in the UK are being subjected to a 12% overall increase in prices. In practice this works out at a much lower figure of less than 5% [am currently involved in a project to evaluate this figure] & this only affects certain products. There are also strategic considerations such as food security & standards that are inherent in this issue.

Fish is unlikely to reduce very much in price as it is now a very much globalized food resource & will always go to the highest bidder. The UK benefits greatly from very well established international trading arrangements & the UK government will not be so dissimilar to the EU when considering tariff & standards levels for food imports.

Philip Hammond will want his share of revenue much the same as any EU administration & farmers will seek a continuation of their subsidies & protections.

Possibly only a small number of products will benefit from reduced tariffs, such as sugar which is highly protected in Europe [German & French farmers pressures] - expect a significant reduction in sugar [50%] & a few other products but there will not be such a bonanza across the board as might first be thought. Also expect a disruption to the sugar-beet industry in the UK which is in the process of converting some capacity towards biobutanol production.