The Renewed Spectre of Inflation

Mark Sandford February 2010
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Consumer inflation is now poised to become the latest debating point among economists of all persuasions after the recent CPI figure rose to 3.7% according to the ONS. This has been driven by recent increases in the cost of energy and certain foodstuffs, notably wheat on world markets. Wheat has jumped up to $9 a bushel, caused by destruction to crops in the Russian Federation due to wildfires and drought elsewhere. There are also concerns about future yields elsewhere and not just in the United Kingdom. This raises the issue that supply will constantly struggle to keep up with demand, amidst a continual increase in world population.

The price of Brent crude has leapt to $98.80 a barrel on the back of growing demand from such countries as The Peoples Republic of China. This ultimately puts more pressure on both the utility and manufacturing sectors. Natural gas will ultimately increase as well, although global reserves are plentiful. Some power companies such as Eon have already announced price rises for electricity supply to households who are struggling to cope with stagnant income levels and widespread increases in daily costs of other goods. (see http://www.bbc.co.uk/news/business-10851170)

Factory gate inflation is now running at 4.2 compared to December 2010 according to the ONS. Again, this is led primarily by the cost of energy, notably oil which will hit profit margins if manufacturers are unable to raise the price of their own goods leaving factories due to competition.

This will also put more pressure on the Bank of England to increase its interest rate, still at a historic low of 0.5%. This level cannot be expected to last given the fact that commodity prices are now on an upward curve. It is surely a matter of time before interest rates do go up possibly to 2%.

This need not be a disaster for the wider economy as long as the process is managed. It would increase borrowing costs in the short term and the pound would also go up against other currencies such as the US dollar. In the medium term, if the pound did rise against the US dollar, this would help mitigate rising prices of commodities as most of these are priced in dollars on global markets. It would also help UK manufacturers absorb costs of raw materials.

The surge in food prices has had an immediate consequence already. The Tunisian government was forced to impose a curfew in the capital Tunis and outlying areas after violent protests over food price hikes and high unemployment. These demonstrations have now left over 60 people dead. Other similar protests have now occurred in other countries such as Morocco and Jordan. The Tunisian President Zine el Abedine Ben Ali has also fled with his family into exile in Saudi Arabia having been in power since 1987.

It is now probable that more social instability will result particularly in those countries where a large part of the population lives on the breadline. It is the very poor who are immediately impacted by the cost of staple foodstuffs such as wheat and this creates a potentially explosive force. Within the Muslim world, it also creates more grievances to be exploited by extremists.

Mark Sandford - Permission granted to freely distribute this article for non-commercial purposes if attributed to Mark Sandford, unedited and copied in full, including this notice.

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