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A food price puzzle for the UK

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Stephanie Flanders | 13:49 UK time, Tuesday, 1 March 2011

We all eat food. So we should all be interested in what's happened to British food prices in the past year or so. The members of the Monetary Policy Committee who appeared before the Treasury Select Committee this morning also have what you might call a professional interest in the subject. Along with other commodity prices, rising food prices have been a key piece of the British inflation puzzle that the Bank of England has been getting wrong.

There's a micro issue here, and a macro one. The "micro" puzzle, highlighted by recent research by UBS, is whether and why UK food prices have been rising more quickly than in other countries. The "macro" puzzle, highlighted by deputy governor Charlie Bean in his answers to MPs, is why British companies - including food retailers - have been able to pass on higher input costs to consumers, despite the subdued state of domestic demand.

On the micro puzzle, these are the highlights of the UBS study:

"Clearly, all economies have had an increase in consumer food prices over the last year - the significant rise in commodity prices has generally offset or more than offset the modest declines in labour costs that have been experienced. The UK does, however, stand out as being somewhat anomalous in experiencing significantly more consumer food price inflation than elsewhere." (see chart below which is on page 7 of report)
"This pattern tends to hold when we break food down into its subcategories.Looking at the broad subcategories of food that are identified by Eurostat, the UK stands out as having the broadest range of food price increases. Politicians may well feel justified in asking 'if everyone faces the same commodity price increases, why does the UK have so much more food inflation?'"
Graph showing food price inflation in selected economies (food consumed at home)

There are some possible answers to that question. One very obvious one would be that the fall in the pound has pushed up food prices faster than in other countries. If you looked at a similar chart for CPI inflation overall, you'd get a similar picture: prices going up faster in the UK.

Is there anything that is happening to food inflation that can't be explained by the weak pound? The UBS researchers think so: they estimate what's actually happened to the cost of retailers' inputs, including import prices (so, taking account of sterling) and changes in industry wages. They then estimate how prices "ought" to have risen, in response to these cost changes, and compare that to what actually happened. The results are shown in this second chart (from page 11 of the report).

Graph showing UK processed food CPI compared to a cost-based pricing model

Their "killer" conclusion is that the cost of retailer inputs has risen by about 3.5% in the past year, while the average price of processed foods in the shops has risen by 6%. As the authors suggest, that is likely to cause some bother for the supermarkets, and probably renewed calls for politicians to "take action" against the supermarkets. (As ever, what that action might be is less clear).

However, there is another, equally interesting, conclusion to be drawn from this chart - which is that, until recently, there was a remarkably strong correlation between the cost of the inputs and the cost paid by the consumer. UBS says the correlation is 93%. That is what you would expect to see in a competitive market.

If the UBS model of costs is roughly right - and it very rough and ready - then there is a short-term UK food price puzzle, but long-term, retailers seem to have adjusted prices in line with their costs. Indeed, in the early noughties, the chart suggests they were actually raising prices more slowly than cost increases would have justified.

This is about the rate of change in prices. There has been a similar argument, in the past, about the level of UK food prices. In 2000, the Competition Commission found that food prices were 12-16% higher in the UK than in other similar European countries, but the difference could be explained by, among other things, different planning regulations in the UK which pushed up the cost of commercial land.

More recently, Eurostat found a similar price gap. The micro argument over these numbers, and what, if anything, they tell us about UK retailers will run and run. But for the Bank of England, the more urgent puzzle to solve is the macroeconomic one.

As Charlie Bean explained to the MPs on the committee, one of the reasons the Bank has got its inflation forecast wrong was that it underestimated how much "pass-through" there would be from a lower pound (and therefore higher import prices) to higher retail prices. In the 2006 speech that I cited a few weeks ago, he made much of the fact that a sharp rise in energy prices had not then translated into higher inflation. He believed this was due to tougher global competition:

"Exactly the same heightened competitive pressures in product markets that appear to have contributed to the flattening of the inflation/activity trade-off, may also have affected the way that businesses have responded to the increase in energy costs. Rather than immediately pass on in full such increases in higher prices, it appears that they may have instead looked to lower other costs, either by granting lower wage increases, or by putting downward pressure on the prices of intermediate inputs, or by raising efficiency. Our regional agents have also asked a sample of their business contacts how they have responded to the squeeze in profit margins occasioned by the rise in energy costs. The survey suggested that relatively few businesses expected to be able to raise prices and instead planned to raise efficiency, reduce employment or push down on wage and other costs. And some respondents felt they had little alternative but to accept the hit on their margins. That was especially the case in manufacturing, which is the sector that is most exposed to international competition."

British manufacturers are just as subject to global competition now as they were in the mid-noughties. When you consider the subdued state of the economy, you would think they would be even less able to pass on cost increases in 2010 than they were in 2006.

Instead, as the deputy governor noted in his testimony, we have seen the opposite: a higher degree of pass-through than before, and a much worse forecasting record for the Bank of England. That is one of many puzzles about the UK's inflation rate that the Bank now urgently needs to solve.

Comments

Page 1 of 2

  • Comment number 1.

    So have the BBC now given into the government and the BoE and have adopted CPI as the official measure of inflation and have abandoned RPI. When examined it is generally understood that RPI is a more accurate measure of inflation experienced by ordinary and less well off consumers. Some studies have shown that even RPI underestimates actual inflation for the poorer citizens.

    When it comes to supermarkets by definition (myriad range of items and promotions) just how does the average consumer have the time to test for themselves their competitiveness. the management of these markets is progressive and relentless.

  • Comment number 2.

    Monopolistic supermarket chains extract money from the consumer. Stop the presses!

  • Comment number 3.

    What of the traders who drive these markets in good times and bad. What goes through their minds as the markets rise or, for that matter, fall?
    This is a fascinating psychoanalytical exploration of the world of the commodity trader: The ordinary madness of markets:

    http://www.mindfulmoney.co.uk/3184/investing-strategy/the-ordinary-madness-of-markets-inside-the-minds-of-traders-video.html

  • Comment number 4.

    There are clear signs of a pick-up inflation and if margins are rising too then we should all be worried about a strong pick-up. Mind you I saw a good blog post today which pointed out this about some economic figures released this morning.
    "Looking further into the PMI figures I noticed that their input price figures track quite well with the input price figures used by the Office for National Statistics. I raise this point because the latest figure on an annualised basis is well above 20%. I hope that the Bank of England takes a look at these figures before its next vote on interest-rates which takes place next week."
    http://t.co/4hgGbiq
    Rises on anything like that sort of scale would be very worrying I feel.



  • Comment number 5.

    I have thought for some time that the higher proportion of UK mortgages on variable as opposed to fixed rate has meant that monetary policy has far more of an impact on disposable income here than in many Western countries, thereby allowing for heightened pricing power amongst consumer facing sectors and hence higher inflation.

  • Comment number 6.

    "the difference could be explained by, among other things, different planning regulations in the UK which pushed up the cost of commercial land."

    This is a hoary old chestnut. If there is a driver of commercial land prices it is the bubble in the housing industry which makes housing a more profitable urban land-use than any business use. All the major retailers have land-banks much greater than their current development plans would require. They also only release land with covenants which prevent competitors making effective use of it.

    It seems more likely that the oligopilistic nature of retailing in the UK means that the major retailers are able to set their own prices: in line with costs when it is expedient to do so, and to build cash piles in times like these when the banks aren't lending.

  • Comment number 7.

    On the first of October 2010 Stephanie wrote on this blog.
    "With the possible - very limited - exception of inflation expectations, it is hard to identify a single indicator suggesting inflation is about to pick up."
    Today she writes.
    "Along with other commodity prices, rising food prices have been a key piece of the British inflation puzzle that the Bank of England has been getting wrong.
    Not just them Stephanie, not just them.

  • Comment number 8.

    I am delighted to see you exploring the subject, but frankly amazed that there is not even a passing mention of speculating on food commodities (and related shocking activities like hoarding or flooding) by financial institutions and private hedgefunds, which many economists say is a contributing factor to the spikes and market shocks that add to the price of raw materials.

    For an article which simply explains this practice, please read:
    A Shocking Shortage of Limes in Waterloo

  • Comment number 9.

    A question for you, Stephanie: did UBS account for changes in the VAT rate?

  • Comment number 10.

    I have been saying for a long time now we're totally exposed in the UK to prices, mainly because we're so heavily dependent on oil (which is an inflationary for all goods and services - due to our high level of road transport)
    We're not the US, so unfortunately oil isn't priced in our currency - making the problem worse. You can't export your way out of recovery without exports - the whole 'usual' plan of currency debasement will fail due to these factors.
    In the past there has always been a strong export sector to drive us out of recession (plus new markets).

    So now Charlie Bean has said it - reporters dutifully report it. It's a good thing these 'professionals' are not paid for their '6 month late' predictions and it's all on a voluntary basis.

    Am I concerned or jealous at the lack of recognition? - well not really because I know what's coming next.....and maybe in 6 months time (when it's actually happening) - then Charlie will give it a mention.

    "British manufacturers are just as subject to global competition now as they were in the mid-noughties. When you consider the subdued state of the economy, you would think they would be even less able to pass on cost increases in 2010 than they were in 2006."
    WHAT else are they going to do? - reduce wages? - have you forgotten their employees are also their customers? Reducing wages will simply depress their business yet further - it's a squeeze Stephanie - and not a nice one!
    Retailers are putting up prices because they have no choice - it's the result of QE - when someone finally joins the dots then maybe people will consider a bit more before calling for QE2 and more.

    "That is one of many puzzles about the UK's inflation rate that the Bank now urgently needs to solve."

    Cripes - it's not a puzzle, it's simple logical analysis. What are they paying these people again?

    You could have come to me, I'm much, much cheaper - and it turns out more accurate too. I'm just waiting until they work out that when food prices rise then the inclusion of DVD's and LCD TV's in the RPI index is a little misleading......

    ....more on that in 12 months when 'Charlie' has a revelation!

  • Comment number 11.

    4. At 2:58pm on 01 Mar 2011, DorsetJane wrote:

    "There are clear signs of a pick-up inflation "

    Don't you need Growth for that?

  • Comment number 12.

    I'd like to know what proportion of the rises are genuine rises (increased production, farming costs) and what are due commodity trading.

    Not that I'm paranoid or anything (experienced bloggers please advise) but could this be a way to extract wealth from the masses because other methods have dried up?

  • Comment number 13.

    "A food price puzzle for the UK"! No it is not....

    Simple: the pound has depreciated by 20% or so hence as most of our food is imported it has gone up in price!

    This is the price we have to pay for the idiotic Bank of England currency/interest rate policy! They want imported inflation and that is what we get from peaches through to petrol!

  • Comment number 14.

    Are we measuring the price in Euros, Dollars, Pounds, square metres of a house in the Royal Borough, square metres of an artisan house in the West Midlands or fractions of an average banker's (or food commodity trader's) bonus? They will all give different stories about relative inflation.

    And how has the relative quality of food found on supermarket shelves in different countries been accounted for?

  • Comment number 15.

    The problem is even worse than that, because CPI and RPI compares like -for-like.But what are we actually paying out when we go shopping..... is a heck of a lot more than 6% extra. Why? Because an even more massive factor is gentrification and its impact on prices in Britain.
    If instead of the tins of tomatoes at 9p (and even 3p or 4p) at Asda, you go for Tuscan, on-the vine, sundrenched organic plum tomatoes at Marks and Sparks, for £3.99,is that a 4333%( or even a 10,000 to 13000%?) price increase?
    Or from a tin of John West Pink @ 89p to hand-smoked-in-oak Loch Fyne Select Salmon fillets at £8.99.
    At Waitrose a pack of gammon for 69p is now honey and chicory smeared Norfolk Loin Fillet at £4.49
    Own brand used to mean bargain basement ,but now they are priced the same or more than the branded equivalents.
    Three pounds of loose spuds for 29p is now a pound of baby boiling cyprus totties at £2.99.
    Even a packet of crisps at 25p is now a £2.50 kettle chip extravaganza.
    Wipe and chuck Bog roll 29pis being supplanted by allergy-aware baby wipes ar £2.99.
    Bog is no longer standard!
    Our economy is disappearing up its own pampered and pretentious bottom.
    Look at all the flashy financial services products that are beautifully marketed pieces of utter swindling rubbish.
    It is about market control .
    Even offers like "We'll match and beat our competitors" is more about ensuring price conformity than anything.
    It is actually quite hard to find flour and eggs and loose veg.
    And add a tenner for the green loony congestion charge( and extra for the plastic bags which are more eco-efficient than the long use ones,but don't get me started,that's another rant entirely) and a tendency when buying online ..... add another fiver , to add any old rubbish on to the list .... and Mrs ho is spending old onward broke.
    Two hundred quid and nothing left in the fridge a couple of days later.

  • Comment number 16.

    What about the fact that all commodities are priced in dollars and that the fed is printing all day long new dollars as part of its QE 2 "stimulous". How hard can it be to put the pieces of the puzzle together.


  • Comment number 17.

    In Britain the biggest hike in prices is from the rise in the worst form of VAT:

    VALUE-ADDED-TRASH!

  • Comment number 18.

    I place the blame onto the shoulders of BEN BERNANKE, the Federal Reserve Chairman of the United States.
    Last August, Mr. Bernanke announced further Federal asset purchases known colloquially as "quantitative easing II," or "QEII". The goal was to ease monetary conditions in the United States.
    But surely a man of Bernanke's intelligence foresaw the consequences.
    Cheaper money lowered the costs & escaled the rewards of SPECULATING on food and energy. The latest rise in commodity prices began right after Mr. Bernanke's QEII implementation: In turn, expensive food fired the unrest in Tunisia, then Egypt...
    QEII does enables COMMODITY INFLATION, both by incentivizing SPECULATION. International commodity prices are established in dollars; so, QEII means more dollars chasing the supply of goods. The Food and Agricultural Org. states without a doubt: the American dollar's post-September 2010 weakening was a "lead factor" in commodity INFLATION.
    Sure, there are other factors e.g. drought destroying Russian crops, floods in Australia destroying wheat.
    But these other factors do not take the blame off the United States of America's Fed. e.g. Subsidies and consumption quotas for corn-based ethanol divert crops & land to "green" industry that actually saves very little environmentally, but decreases consumption yields.
    Other US policies such as
    - protectionism for sugar producers and
    - direct payments to cotton farmers
    distort actual prices. Reforming the American ill-conceived policies, especially those that are protectionist, would improve global commodity markets. It's too late to abolish QEII, but QEII ends in a couple of months anyway.
    Watch out for QEIII!
    Higher food prices hurt the poor - especially the poor of developing nations where more is spent on food than in the west. Costlier food all by itself can be destabilizing, but there have been no food riots in India or the Philippines.
    As Tunisia, Egypt, Oman, Saudi Arabia, Libya...prove, destablization is a mixture of human misery and authoritarian tyranny.
    Does this help to solve the British quandary re INFLATED FOOD PRICES?

  • Comment number 19.

    Lack of competition at wholesale level is also an issue: the "big is beautiful" agenda has fueled the mergers and acquisition M and A) business to an alarming extent. The shareholders and M and A agencies have benefited at the expense of customer value for money. Food industry has always had large food conglomerates but recently some of them have been swallowed up.

    Should Cadbury's takeover by Kraft been allowed? These oligopolies can and do distort market prices for commodities. Speculative buying is not helping matters. We also import far too much food that we could grow here. Demand for our own food reared here has risen hugely in countries like China and India which has pushed up prices - Scotch quality beef is a good example.

    Not all food retailers in the UK had a good year result wise in 2010. One of the largest by sales had its lowest profit figures for a decade - perhaps they have ratcheted up their prices to boost profits. The supermarket chains are quite canny in placing their stores geographically to minimise local competition - the government should be doing more to curb this practice.

  • Comment number 20.

    15. At 4:43pm on 01 Mar 2011, onward-ho wrote:
    Our economy is disappearing up its own pampered and pretentious bottom.
    ------------------------------------------------

    On Womans Hour last week there was a food expert saying that people were having trouble affording to eat healthily.

    He cited the price of pomegranates.

    My response to this would not get through moderation!

  • Comment number 21.

    12. At 4:09pm on 01 Mar 2011, Itallboilsdownto1thing wrote:

    "Not that I'm paranoid or anything (experienced bloggers please advise) but could this be a way to extract wealth from the masses because other methods have dried up?"

    This is not paranoia - lets see...

    Equities - nope, cheap but not much sign of dividends in the near future, profit warnings coming out still (like the 1930's)

    Government debt - due to the 'flight to safety' factor this is a poor return, unless you pick one of the 'certain defaults' like Greece, Ireland, Portugal etc. but these rates reflect the priced in haircut.

    Corporate debt - currently the option available, but as with the sovereign debt, the successful corporations are using their hoarded cash and offering very little in return, the small caps are offering higher returns - but are unlikely to make it through to pay it back. Larger corporations are keener to buyback not issue more debt.

    Cash - Interest rates...say no more...

    Commodities was always the next choice - I mean people always have to eat / drink / travel. It was obvious back in 2009 and it's only now that the BoE is realising it.

    The really scary part is that the oil price is rising - which usually means trouble, and yet the US treasury sales are suffering poor demand. This is not the sign of a 'safe haven' - which the dollar usually is. This is infact the first signs of the dollar being shunned - and could be the start of it's inevitable fall.

    ...but don't listen to me, listen to the Economists - they say everything is fine, price rises are but an illusion.....move along....move along....

  • Comment number 22.

    @12. At 4:09pm on 01 Mar 2011, Itallboilsdownto1thing wrote:
    "I'd like to know what proportion of the rises are genuine rises (increased production, farming costs) and what are due commodity trading.

    Not that I'm paranoid or anything (experienced bloggers please advise) but could this be a way to extract wealth from the masses because other methods have dried up?"

    -----------------------------------------

    Complicated business. With production, processing, packaging, transport on the supply side and changing patterns of consumption on the demand side. Well.....I'm sure traders are happy to make a quid out of it all. Food, oil - what else is such a guaranteed earner (it's called price inelasticity of demand). But govts have a tendency to interfere too (I'm not decrying their intentions but the effect might be the opposite of what they want):

    http://www.bbc.co.uk/news/world-south-asia-12593755

    http://www.bbc.co.uk/news/business-11772184

    --------------------------------------

    @10. At 3:49pm on 01 Mar 2011, writingsonthewall wrote:

    "Cripes - it's not a puzzle, it's simple logical analysis. What are they paying these people again?

    You could have come to me, I'm much, much cheaper - and it turns out more accurate too. I'm just waiting until they work out that when food prices rise then the inclusion of DVD's and LCD TV's in the RPI index is a little misleading......

    ....more on that in 12 months when 'Charlie' has a revelation!"

    -----------------------------------------

    There's a market there for a cookbook using worthless tat. A small selection of my specialities:

    Flatscreen bourguignon, DVD terrine, blackberry marinade, iphone stew......

    I intend to charge more than you for my culinary expertise.....

  • Comment number 23.

    "British manufacturers are just as subject to global competition now as they were in the mid-noughties."

    Surely not. They're now benefiting from the depreciation in sterling, so they can raise sterling prices by an equivalent amount (20%?) and still be just as competitive globally. It's only we users of sterling who find our prices have risen...

  • Comment number 24.

    Our Uk supermarkets control about 80-85% of all of the food consumed in the UK ... that is just about 5 or 6 main supermarket cartel supply chains.

    The problem with supermarket cartel, 'over-privileged' (get me a planning permission pdq in the greenbelt etc from a cabinet minister married into the cartel) 'price rcaket creep' is not the deflation of sterling as is the fact that the supermarket spivs have deliberately and increasingly by-passed British farmers and run British farming into the floor by buying more and more from overseas ... this is very damaging and means hundreds of thousands, possibly a million or more local UK jobs LESS in the UK. This increases the Supermarket Price Creepers' margins by leveraging currency differentials and messing up our UK farmers to the point of empty fields, rusting milk churns, empty cow sheds and convoys of lorries heading our way from Poland and netherlands etc and mislabelling of their produce.

    It is high time that the supermarkets were fined for not buying British and are required say 60% of their food within about 50 miles of each store and give up say 30% + of their floorspace to local farmers and other markets etc.

    Time for change ... time to buy British and put these supermarket racket 'back stabbers' ... in their place.

    Broken Britain .... spivved dry.

  • Comment number 25.

    It is almost useless to compare food price inflation in different countries like this. A comparison can only be made if you include the following;
    1) Does each country import the same amount and type of food per capita?
    2) Adjust 1) for exchange rate fluctuations. How has this changed in the past X years?
    3) Does each country's foodstuff supply chain cost exactly the same per shopping trolley? How has this changed in the past X years?
    4) Is each country's tax system the same? How has this changed in the past X years?
    I could go on, but I'm not a highly paid economist on a slow economic news day, nor a highly paid BBC employee on a slow news day trying to scare people.
    Public service, impartiality? What will Mandellson ask you to scare us with tomorrow?

  • Comment number 26.

    What on earth makes you think the economy is "subdued"? Demand is booming, with a huge government deficit (loose fiscal policy) and ultra-low interest rates (loose monetary policy). That's why the pound has dropped so much, and why inflation is taking off. Prices charged by supermarkets are set by supply and demand, and not by the level of input prices. Britain has booming demand, hence the rising prices for food and lots of other things.

    Output is indeed subdued. The fact that output is subdued but demand is booming is only "puzzling" if you believe all the old Keynesian nonsense. Artificial demand stimulation just causes inflation, not growth.

  • Comment number 27.

    British manufacturers gain little or nothing from devaluation. Most of the components and raw materials that we buy are imported, just like the stuff the general public buys. And, of course, the stuff the employees buy, employees, who, quite fairly, want to maintain their often very modest living standard.

    Any 'advantage' of devaluation to British manufacturers lasts perhaps six months and then it just causes them at best the same problems as it does to everyone else.

    Who gains from devaluation? UKGov and others with Sterling debt. And, I almost forgot the genius currency traders/speculators who, no doubt, have made fortunes for themsleves (sorry for the UK) in the process of devaluation.

  • Comment number 28.

    As the price of oil (in dollars) is such a key factor in any price rises in the UK , I was pleased to see today the pound had hit a 13 month high aginst the dollar. This is surely good news and we can all look forward to prices falling due to the strength of the pound ?

  • Comment number 29.

    It might be that the inflationary pressures in the product markets are increased not because of lower global demand (which appears to be the case) directly but because of the knock on effect on global competiton which may be less, and in a less active market and prices are thus higher all round?

  • Comment number 30.

    http://www.bbc.co.uk/news/business-12610324

    Meanwhile, more vague mumblings from King ... Are the Treasury Select Committee really so naive and gullible to be repeatedly taken in by the most insulting twaddle from this Whitehall statistical gloss stooge?

    Inflation will fall but he doesn't know when?

    No wonder the UK is in such a mess economically.

  • Comment number 31.

    13. At 4:16pm on 01 Mar 2011, John_from_Hendon wrote:

    "A food price puzzle for the UK"! No it is not....

    Simple: the pound has depreciated by 20% or so hence as most of our food is imported it has gone up in price!”

    This keeps coming up - could you please explain to me exactly where you get your figures from that relates to food price inflation over the last year and the 20% depreciation in the pound you mention?

    I’m not an economist but can’t find any evidence for such a claim unless you include the price of oil, inflation in the supplying countries, vis-à-vis the UK, the currency that the commodity had to be purchased in, and some trading currency I’ve yet to establish, not to mention any time frame (a year or so at the most)?

    Any help would be appreciated as I simply don’t understand this (20%) depreciation in the value of the pound.

  • Comment number 32.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 33.

    http://www.nakedcapitalism.com/2011/02/guest-post-the-price-of-oil-%E2%80%93-where-the-outrage.html
    An interesting article on how speculation is effecting oil prices. Despite this I think that the chances of the US invading Libya, to preserve oils supplies, sorry, save the people from their leader,is very high,and getting higher by the day.

  • Comment number 34.

    11. At 3:51pm on 01 Mar 2011, writingsonthewall wrote:
    4. At 2:58pm on 01 Mar 2011, DorsetJane wrote:

    "There are clear signs of a pick-up inflation "

    Don't you need Growth for that?


    Do you.

    It has a name - stagflation - flat or no growth and inflation - a UK speciality, especially in the 1970s.

    Back to the 1970s flares and long hair. Still got the former but not the latter.

  • Comment number 35.

    SF wrote "Their "killer" conclusion is that the cost of retailer inputs has risen by about 3.5% in the past year, while the average price of processed foods in the shops has risen by 6%."


    Two minor queries:-

    (1) Is it not the case that for the market mechanism to work well that prices need to be stable? By not doing its job perhaps the BoE has allowed a bit of information asymmetry to occur ... in other words given the cover to allow supermarkets to put up prices.
    (2) From the supemarket perspective I guess that with 10000 shifting price curves that a change in prices, product mix and shelf space allocation is inevitable. Don't businesses seek to optimize when environments change?

  • Comment number 36.

    1. At 2:26pm on 01 Mar 2011, watriler wrote:

    When it comes to supermarkets by definition (myriad range of items and promotions) just how does the average consumer have the time to test for themselves their competitiveness. the management of these markets is progressive and relentless.

    -----------

    My spreadsheets confirm that Sainsbury's and Tesco's are now more expensive across my fixed range of food purchases (and other domestic products) than my little corner shop or the drive to the opposite side of town to the Co-op. I don't shop at Sainsbury's and Tesco's anymore because of their blatant, and often dishonest, marketing - which is basically brainwashing their customers, who probably don't have the spare capacity or the anorak attitude that I have to shopping! They also ship in salad stuffs from thousands of miles away when I can buy tomatoes from Norfolk, celery from Kent, etc. I don't buy anything not produced in the UK - more anorak for you!

    On Peston's Picks 12 January 2011 under Lloyds' Daniels to receive £2m bonus, I wrote:

    "Talking of customer complaints - on a low income, you generally buy the same things week in and week out, if there is anything left of your income after paying the exhorbitant gas/electricity bills, which are just going up and up. I keep a spreadsheet on my costs and at Sainsbury's before Christmas, I complained at the "service" desk at the obvious profiteering on a Quorn Roast which was marked as "25% down". (No response from Sainsbury's yet - too busy counting their profits!). The roast was 25% down on the RRP price displayed but that was 18% more than I had paid for it two weeks before and was 89pence higher than I eventually bought it at Morrisons. No wonder Sainsbury's results are good. By the way, I am now travelling across town (at a cost in fuel) to buy from the Co-op".

    Obscene profiteering by large multi nationals (too big to fail, just like the damned banks) is my take on UK costs being higher. Also, maybe Sainsbury's and Tesco's haven't got the same exposure or coverage elsewhere in Europe as they do in the UK!

    P.S. Still no response from Sainsbury's ref. my complaint about Quorn Roast and no, I haven't been back there since December!

  • Comment number 37.

    It's the VAT wot dun it!

    Observers of British retailing and eating out will know that we love to snack in the streets. That consumption is VAT free. Whereas eating in a cafe or restaurant now carries a VAT rate that's twice or three times the rate in Europe or Florida.

    So the trade in our tourist and restaurants venues has fallen. More people are buying ready meals and take-away meals without VAT on them. That's why British supermarket food prices are more robust than in other countries! !

  • Comment number 38.

    "31. At 7:30pm on 01 Mar 2011, UnionRep wrote:
    This keeps coming up - could you please explain to me exactly where you get your figures from that relates to food price inflation over the last year and the 20% depreciation in the pound you mention?"

    UnionRep - I think it works like this -

    sterling has dropped 20% against "a trade-weighted basket of currencies" in other words they mesure the average value of the currency and what you can buy with it releative to a selection of other currencies.

    for example, the euro has fallen, but sterling has fallen more etc.

    The pound has fallen apparently just over 20%, and that's since the start of the crisis, not in the last year.

    How it relates to imported food price inflation i've no idea, but in theory, all things being equal, everything you import becomes dearer.

    anyone out there tell me if I am understanding it correctly or not?

  • Comment number 39.

    #19 >>Scotch quality beef is a good example.

    It may be a great surprise to you but India and China rarely buy Scotch beef, quality or otherwise !! Most Indians are strictly forbidden by their religion (Hinduism) from consuming beef and most Chinese consume little beef and what little they consume are mostly reared in Inner Mongolia (a part of China) or Outer Mongolia (now known as the Mongolian Republic) !!

    Must try harder !

  • Comment number 40.

    #23 >>Surely not. They're now benefiting from the depreciation in sterling, so they can raise sterling prices by an equivalent amount (20%?) and still be just as competitive globally. It's only we users of sterling who find our prices have risen...

    And where, pray tell, do these said manufacturers get the raw materials that they use to manufacture with ?? From recycling the landfill sites ??

    With the rising cost of imported raw materials, the British manufacturers have to either cut down on the profit margin or increase their selling prices. And unsold, uncompetitive goods still have to be paid for in the form of their imported raw materials; thus contributing to the inflation !!

  • Comment number 41.

    #24 >>It is high time that the supermarkets were fined for not buying British and are required say 60% of their food within about 50 miles of each store and give up say 30% + of their floorspace to local farmers and other markets etc.

    Considering that British farm products usually cost much, much more than imported food products, this practice is going to do inflation no end of good !! That'll soon lead to a booming black economy of smuggled Irish butter and beef, just for example !! And, considering that transportation and its attendant fuel cost are major factors in the food price inflation, we really should only fill up with 60% of petrol and diesel produced within 50 miles of the pump and allow 30% of the pumps for selling fuel produced locally !!

  • Comment number 42.

    #25 >>1) Does each country import the same amount and type of food per capita?

    When I was in Brodeaux this last Autumn, I consumed large quantities of various forms of snails and offal and shellfish. Just can't seem to find any of that in the local supermarkets !! And then, there's the wild boar and mushroom pate, oooh, the pate.....

    >>3) Does each country's foodstuff supply chain cost exactly the same per shopping trolley?

    Don't see too many bottles of wine in British shopping trolleys !!

    >>4) Is each country's tax system the same?

    The tax over there is horrendous but the benefits are great !!

    Finally, they grow a far higher proportion of the food AND drink they consume than Britain does !!

  • Comment number 43.

    #28 >>As the price of oil (in dollars) is such a key factor in any price rises in the UK , I was pleased to see today the pound had hit a 13 month high aginst the dollar. This is surely good news and we can all look forward to prices falling due to the strength of the pound ?

    It is not the value of the quid vs the dollar that's important but the value of the dollar vs the rest of the world. Since the price of oil is independant of the value of the dollar, when the dollar falls, the price of oil automatically rises; thus negating any differences between the value of the quid vs the dollar !! If the rest of the world is willing to pay more dollars per barrel of oil, then Britain can follow suit or do without !!

  • Comment number 44.

    #34 >>Back to the 1970s flares and long hair. Still got the former but not the latter.

    And don't forget those chunky shoes and VERY, mini skirts !! :-)

    Inflation, you know. Rising cost of material means the skirts have to be tinier !! :-)

  • Comment number 45.

    #38 >>How it relates to imported food price inflation i've no idea, but in theory, all things being equal, everything you import becomes dearer.

    What you've said is essentially correct. As for food price inflation, if you buy Jamaican bananas in Jamacian dollars, then, when the quid falls, you'll have to pay more quids for the same value in Jamaican dollars !!

    My example is probably as clear as mud !! :-)

  • Comment number 46.

    At my local Sainsburys three weeks ago, I paid twenty pounds for a 6.4kg packet of Ariel. The following week at the same store it was on offer for ten pounds. Does this mean that we have deflation, and not inflation?

  • Comment number 47.

    Stephanie,

    I would suggest the obvious answer to the disparity puzzle is that the report writers have mis-calculated the inflation in the input costs of British retailers.

    They say these were 3.5% in the past 12 months. Well fuel alone has gone up by about 15% in this period and this is a much higher overall factor for British retailers than it is elsewhere due to the higher proportion of our food imported from abroad compared to our European neighbours, and the resulting higher transport costs we have due to food miles. Then food input commodities such as wheat and rice have all gone up by considerably more than 3.5% and so have resulting meat products fed on this. 3.5% must be a massive under-estimation to even uninformed observers.

  • Comment number 48.

    Stephanie,

    Reading recent posts on your blog it is at last appearing to dawn on many that the price of energy and above all oil is the real economic Elephant in the room for Britain and the rest of the over-populated world. Even if Libyan oil comes back on full stream oil will continue to trend higher over the medium term because we can't get enough out to meet growing world population demand. No viable substitutes exist to effectively counterbalance the rising gap between rising demand and falling production. Get used to a stagnant and even falling economy for the next few decades until someone invents useable nuclear fusion or a matter/anti-matter warp drive equivalent. Electric/battery power options limply being proposed currently don not pass even basic muster.

  • Comment number 49.

    "The UK does, however, stand out as being somewhat anomalous in experiencing significantly more consumer food price inflation than elsewhere." (see chart below which is on page 7 of report)"

    Call me cynical but.....

    if all our talented commentators and economists, after looking at their charts of world commodity prices, start banging on about it and asking eachother 'what does it all mean Basil?' then any savvy grocer who, notes that the Govt have also caused prices on vatable goods to increase twice in the last couple of years, will spot an opportunity.

    Wait for the Supermarkets' results this year for proof.

  • Comment number 50.

    Most people working in finance in the big comapnies will know what contributes to this. More competitive markets, comapanies inumerable internal efficincy programs and the rigour of market reporting i.e. hitting financial objectives. There is more universal acceptance that profits must be sustainable. There is no shame increasing pries first competitors will follow as they are under he same pressures and there is no differntiator. There is a form of built in eqilibrium.

  • Comment number 51.

    11. At 3:51pm on 01 Mar 2011, writingsonthewall wrote:
    4. At 2:58pm on 01 Mar 2011, DorsetJane wrote:

    "There are clear signs of a pick-up inflation "

    "Don't you need Growth for that?"

    According to monetarists yes.Increase the money supply,(QE),makes money cheaper,businesses and consumers borrow.Low or negative interest rates have the same effect.

    It hasn`t worked.Banks have have hoarded the cash from their sale of assets to the BOE,and although interest rates are negative, borrowing has not increased.

    Why? Because investment and consumption is depressed,businesses and people only need money if they are buying goods and services.

    Lack of aggregate demand means that an increase in the money supply increases inflation more than it increases demand.It is probable that other factors have influehnced inflation more than money.

  • Comment number 52.

    44 Ishkander

    Depressions lengthen skirts.Periods of prosperity and wars shorten them.

    Work it out.

  • Comment number 53.

    50. At 07:37am on 02 Mar 2011, jer wrote:
    "Most people working in finance in the big comapnies will know what contributes to this. More competitive markets, comapanies inumerable internal efficincy programs and the rigour of market reporting i.e. hitting financial objectives. There is more universal acceptance that profits must be sustainable. There is no shame increasing pries first competitors will follow as they are under he same pressures and there is no differntiator. There is a form of built in eqilibrium."

    If I read you correctly,the internal corporate environment is responsible for pricing as is external competition?

    I understand that strategies like branding and price fixing restrict competition,nevertheless most supermarket products are substitutable with high price elasticity.Own brands are an example.

    If UBS is right,a correlation of 0.93 between inputs and supermarket prices shows competition works in this sector, despite the monopolistic tendency of some suppliers.

  • Comment number 54.

    Adam Collyer

    "Output is indeed subdued. The fact that output is subdued but demand is booming is only "puzzling" if you believe all the old Keynesian nonsense. Artificial demand stimulation just causes inflation, not growth."

    You`ve really got me there old scout.If demand is booming and output subdued where`s it all going? Can`t be exports because the terms of trade have turned again us,ie.we are running large deficits on current account.

    I`ve got it,they`re calling it nuclear waste and tipping it into a hole in Cumbria.It`s that wicked man Osborne,he`ll ban Christmas next.

    As for Keynes,you can blame him for a lot but artificial stimulation was not one of them."I`ve heard you can buy it now in shops?



  • Comment number 55.

    Steffie,
    Your colleague, John Humphrys, gave up harrumphing on the TOADY programme to do some serious journalistic research on food about a decade ago. He made an excellent series of programmes for R4 and produced the obligatory book. I heard the programmes, do not have the book but have flipped through the pages in library or bookshop not long after it was released.

    John has been a bit 'anti-car, pro-tax the motorist' at various times in the past, but he found that fuel costs and transport taxes affected British food prices, played a significant part in food poverty and therefore were reflected in our malnourishment/obesity problems.

    Brown and Darling tapped transport for a bit more money from 2007/2008 onwards. We are seeing PART of the result of that in food prices. Add in some bad harvests in other parts of the world, some protectionism from food exporters and we are where we are. If this is obvious to 'us', and all 'we' are getting is Beeb, ITV, Sky, 20CFox, et al news, how come the BoE and the MPC are in the dark. I would have thought that 'they' are privileged to be getting a lot more information than 'us'.

    I would suggest the following:
    1. The economists in both groups place too much reliance on the macro and not enough on the sub-micro and sub-sub-micro (where the money crosses the counter and for what and to be consumed by whom), and
    2. Some in the MPC (but probably not the BoE) may have some inherent biases or specific fields of view that prevent a bigger picture being seen.

  • Comment number 56.

    re my post above
    Interesting bits of information float into the fluff in Snuffy's brain from all sorts of sources (especially the Beceebbeee!) and for all sorts of reasons.

    Icelandic volcanoes.

    Think back ten months or so. One of the interesting snippets about food, yes, food, from the volcano eruption was that a British company had been helping co-operatives of farmers in Ghana to establish farms, utilise better farming practices, establish markets, etc., and then transporting the output not consumed locally to Britain. This had been up and running for about ten years and had been proving to be a British & Ghanaian business success. {Pause for cheers all around.} This enterprise had significantly helped the communities at the Ghanaian end. {A non-Governmental, non-NGO 'interntional aid success story. More cheers, please.} Their food products were exported to Britain by air - hence the Icelandic volcano making them newsworthy.

    For about fifteen to twenty years, we have had environmentalists and then politicians increasingly saying 'cars and aeroplanes are evil and the cause of climate change; they must be taxed out of existence'. At which politicians think, 'Whoopee! We have a blank cheque book at our disposal'.

    They then tax more and spend more, perhaps without thought of what is the unforeseen result of the tax measures.

    Beware unintended consequences.

  • Comment number 57.

    re #51
    Bryhers is right. Snuffy's feeble brain recalls that the QE requirements were for the banks and other financial institutions (yes, there are many others) to use the QE money to 'buy and hold' gilts. I cannot recall for sure but assume that in extremis, the banks (and others) would be allowed to borrow for liquidity against these securities and in extreme extremis, possibly, to sell them in order to remain solvent.

    If I have remembered that correctly, the idea is that it makes a fast response to trouble that bit easier and much quicker. The recourse to the BoE as lender of last resort obviously takes time, even in a crisis. As we discovered in 2007/08/09 but knew nothing about in 1972/73.

    I also suspect that formal memoranda will have been lodged with the Banks taking up the QE money, stating exactly what is to happen and in what circumstances, but I am now struggling to remember such formalities learnt a long time ago.

    Perhaps a poster more knowledgeable or trained in current practise would care to comment.

  • Comment number 58.

    re #46
    I suspect you were a victim of a bar-code error on the first purchase. It happens. Go back with the receipt and ask for a refund.

    If it was correct - and not some freakish special offer (if it was, it may have been in breach of trading standards rules) - then yes, that is an example of deflation.

    But deflation is a dirty word. (In some quarters.)

    Let's call it negative inflation.

  • Comment number 59.

    41. At 01:47am on 02 Mar 2011, ishkandar wrote:

    #24 >>It is high time that the supermarkets were fined for not buying British and are required say 60% of their food within about 50 miles of each store and give up say 30% + of their floorspace to local farmers and other markets etc.

    Considering that British farm products usually cost much, much more than imported food products, this practice is going to do inflation no end of good !! That'll soon lead to a booming black economy of smuggled Irish butter and beef, just for example !! And, considering that transportation and its attendant fuel cost are major factors in the food price inflation, we really should only fill up with 60% of petrol and diesel produced within 50 miles of the pump and allow 30% of the pumps for selling fuel produced locally !!

    ......................
    Good point ... but you are wrong.
    What matters is most is how many people have a job... that means taxes paid and things being brought and sold ... and savings... and economy depends on as many people as possible having a job and having ability to pay. Britian's success or failure is primarily dependent on the number of British people it can get working in real sustainable jobs
    If you have a job ... then to a large extent the price paid for food does
    not matter within reasonable parameters.
    I'm afraid that your mindset to British jobs/trade/buying British/strict control on UK imports, appears to me to be fairly typical of why Britain does not protect itself and create its own strong internal economy based on full employment and maximising the critical UK sustainable output values (i.e. THE GROWTH).
    Reducing UK VAT and its direct effect on inflation would be key to achieveing real sustainable UK growth also (and the smuggling is an existing problem and avoiding VAT is fairly easy anyway for those who know how and there is no need to smuggle as VAT enforcement for many, is a joke.)
    Getting a proper grip on UK food productions and sales is vital to the possible UK recovery ... although I do agree with what Mervyn King said yesterday to the Treasury Select Committee ... in effect, Britain may never achieve real growth going forward ... and living standards will continue to decline ... this is the result of successive govts continuing to operate a 'bent over privileged and over exposed market economy' when what the UK needs urgently is a 'hydrid economic protective structure' to contain the ravages of the market and aggressive protectionised spivved global and despot economic forces applied to the UK from overseas.
    Either we tackle these issues or we continue in slump, flat-lining or real terms decline.
    We can pay a bit more for our British produced food and (have lower general inflation by reducing VAT significantly) and still all be better off and have more real disposable income ... this all comes down to real net disposable income and maximising the critical doemstic output values.
    The reason that British made agricultural food has become more and more expensive is because of EU protectionsist subsidies to continental farmers and teh disgraceful attitude of price creep supermarket spivs in their treatment of BRitish farmers. This has encouraged UK farmers to run down their farms and investment in producing basic UK foodstuffs ... to the point where they cannot compete with the subsidised and intensively farmed inferior quality food coming into Britain from continental Europe. In continental Europe the banks are more interested in investing in farming than in the UK ... that is another factor.
    If you don't believe me ask a few or quite a few UK farmers ... although I've spent many years on and around farms and heard what UK farmers have had to say.
    One of the main reasons UK food prices are increasing is that much of the food is being hauled across Europe by lorry and the higher fuel costs are now being passed straight onto the UK consumer by our over privileged spivving supermarket price creeping cartels.
    Our food needs a British focus and some foodstuffs should be import tariffed by a few % as being inferior, subsidised production etc and the tariffs be invested in new co-operative UK focussed farms giving jobs to young people and creating new eco friendly communities in rural areas/greenbelts that do not damage the environment with roads and sewers and streetlights etc ... suitable for travellers, prison workers and agricultural workers etc.
    Where we grow and buy our food is crucial to the UK economy and every British citizen ... a new green British focus on our food, energy, recycling and transport can itself lift the UK out of the present slump ... this needs bold and radical strategy and careful intelligent planning.
    FOOD MATTERS!


  • Comment number 60.

    I feel I have to mention this again:

    Yes sterling has devalued from it's height in 2007/2008. But it's rates were a currency bubble, not a true reflection on the worth of the UK.

    It is even now too high, if you look at what we do in the country, our true worth.

    Because it was so high we imported lots and lots of goods, and there was plenty of middleman profit along the supply chain. It was hard to be competitive as an exporter, so exporter's profits were low.

    Now the bubble has burst, and the currency is getting back to a sensible level. All imports have gone up in price, but not by the 20 -25% due to sterlings fall. Why? Because the middlemen's profits have been squeezed. The end retailer can still retain their profit, but everybody else in the chain gets squeezed.

    Exporters can now either make more profit, to offset their costs, or can lower their prices abroad to sell more.

    In conclusion, get used to lower sterling, it's real. Wishing for a bubble in sterling to sort out our problems, is short term and will ruin (again) the UK.

  • Comment number 61.

    57. At 10:02am on 02 Mar 2011, Up2snuff wrote:
    re #51
    ==============================================

    The main intention of QE was two fold; that the BoE would purchase gilts from financial institutions so that:

    A) It would push down the yield (interest rate) of the long-end of curve because the base rate effects primarily the short-end and at 0.5 cannot go much lower. In theory this should cause demand by reducing the cost of long term borrowing.

    B) The banks would use the money from selling their gilts to increase lending.

    A) has occurred but is currently feeding into inflation. B) did not occur as the banks used the money from selling their gilts to the BoE at a high price and buying them back from the treasury directly (or indirectly on the secondary market) at a lower price, doing the "arb". A nice little earner as they say, and I believe this was the intention all along, a subsidy to repair the balance sheets.

  • Comment number 62.

    Quick example:
    We export electronic devices.
    Most raw parts are imported and priced in dollars.
    We pay our employees in sterling.
    End user price is nominally 4 x cost.

    So sell for GBP1000, costs GBP 250, roughly GBP125 in parts, GBP125 in labour.

    Dollar drops 25%. Our cost is now 125*1.25 + 125 labour = 281 (12% increase).

    If we increase our prices to keep margins, UK price goes UP 12%. US price goes DOWN 12%. If we keep price, US price drops 25%, our profits drop 12%, but we sell more.

    So it all depends on what contribution to the cost is UK labour, and what the markup is as to the actual increase needed to maintain profit.

    Somewhere along the line, the UK consumer is still being shafted to maintain larger companies profits: price competition is not working.

  • Comment number 63.

    11. At 3:51pm on 01 Mar 2011, writingsonthewall wrote:
    4. At 2:58pm on 01 Mar 2011, DorsetJane wrote:

    "There are clear signs of a pick-up inflation "

    Don't you need Growth for that?

    _______________
    No you do not need growth for inflation. In fact the reason why governments in the developed economies have been so wedded to the policy of keeping inflation at low levels since the high inflationary experiences of the 1970s and early 1980s (when average OECD inflation during the period was 13% p.a. Source: NBER Working Paper 6062) is precisely because of the damage that high inflation rates do to growth of the real economy.
    Countries that have experienced the horrors of hyper-inflation have generally not been models of healthy high growth economies. Also, remember that the UK and other economies have in the past experienced the phenomenon of 'stagflation', when essentially you have a stagnent or very slow rate of growth in the real economy coupled with high inflation.
    The stagflation phenomenon was very real at a global level during the 1970s and early 1980s, when the 'oil shock' of 1973, the costs of the Vietnam War for the US and the collapse of the Bretton Woods fixed-exchange rate system all happened in short order. The bottom dropped out of the markets and the boom post war growth era of the 50s and 60s came crashing to a halt (although the UK had been crashing for some time in relative terms).
    The monetary policies of central banks flooded the markets with money, but unemployment remained stubbornly high. Union power moved to demand higher wages as inflation started to take hold, partly reflecting the real cost increase of energy (OPEC crisis), partly the US debt (Vietnam) and partly loose monetary policies (central banks). As the wage demands rose, so too did inflation as cost push pressures gathered momentum.
    There are of course many differences between then and now: not least, the Chinese, Indian, Brazilian, Russian and a number of Asia economies were not the economic powers they are today. Hence, when global staglation hit, the 'resource economies' were too weak or too small to offset the impact in the developed economies. Of course, neither China nor Russia (then part of the USSR) were directly involved in the global economic system in the way they are today, being essentially closed societies at the time.
    For example, if China were not purchasing approximatly 30% of the US debt, one wonders whether the Treasury and Ben Bernanke would be having such success with their policies of debt sales and debt purchases.
    So, the governments and central bankers of the Western economies are haunted by the twin spectres of inflation (running away) and deflation as they try to tread the narrow line between the two, against a back drop of trying to get a half reasonable level of growth in the economy. But with the US and many European countries seemingly unable to bring down unemployment to any signficiant degree, the productive capacity of these economies is seriously underutilised. Hence Bernanke now oft quoted comment that he does not believe growth will return with any significance until unemployment is brought down significantly. Remember also that governments tend to use the more optimistic measures of unemployment, so things are worse on the ground.
    In the meantime, stagflation may well become a reality in the not too distant future in the UK and some other countries.

  • Comment number 64.

    Want to know where we're heading?

    All you need to do wis watch this video - unlike most Economists, Journalists, politicians and central bankers - this guy has a record of being RIGHT.

    http://www.youtube.com/watch?v=ej7ocQ5quqc&feature=relmfu

    Revolution 2.0 - it's coming......The capitalists are quaking in their boots.

    There are 3 parts, you can see parts 2 and 3 from links at the bottom.

    one thing about Celente - I have scoured the internet and I have only found 1 blog where someone claims that predictions he has made in the past have been wrong. That's as near to absolute accuracy as you can find these days - unchallenged by mainstream who choose to ignore rather than explore.

    As Celente points out - the new media is the new revolution.

  • Comment number 65.

    It is blatantly clear that our food prices are inflated.If one adds VAT to our prices,like many other EU countries do,then one would see that we have the most expensive food in the world.This is rather typical of rip off Britain.

  • Comment number 66.

    63. At 10:35am on 02 Mar 2011, Straightalk
    'if China were not purchasing approximatly 30% of the US debt'

    It would not be able to sell its productive output into the US market. I doubt that the fed really sees the surplus value of Chinese output being stored in dollar denominated accounts with the US government as a problem, why would it? (Unless the US decided to somehow settle the difference in bullion or some other US sourced commodity)

  • Comment number 67.

    >18. At 4:52pm on 01 Mar 2011, BluesBerry wrote:
    I place the blame onto the shoulders of BEN BERNANKE, the Federal Reserve Chairman of the United States.
    >
    I totally agree and have been saying the same for a while now.
    US QE1 took out all the bad mortgage debts the banks were holding. QE2 gave them extra cash to play with. Rather than lending to businesses for investing in growth they have speculated on commodities for a quick return.
    For proof see food commodity price trends, they all start to go up around Jul/Aug 2010, the start of QE2.
    The likes of Germany and China warned of high inflation but the US persisted as they would be partly isolated from food inflation as they produce so much of the worlds foods. The UK has relied on food imports since before WW2 and is not so fortunate.
    It is time for the UK to invest in food production and to become a little more self sufficient.
    "Dig for Victory!"

  • Comment number 68.

    65. At 10:38am on 02 Mar 2011, friendlyonewhocares
    'This is rather typical of rip off Britain.'

    The banksters do like to take a big fat cut of everything in the UK.

  • Comment number 69.

    -----------------------------------------

    "There's a market there for a cookbook using worthless tat. A small selection of my specialities:
    Flatscreen bourguignon, DVD terrine, blackberry marinade, iphone stew......
    I intend to charge more than you for my culinary expertise....."

    Disgustingto: Put me down for a copy.

  • Comment number 70.

    re #61
    Thanks for post. Snuffy had got the wrong end of the stick on that one.

    So it was the other way round? BoE/UK Plc buying its own 'shares', in effect?

    Entirely legal for a 'company' to do that.

    But I have always had the feeling it was a slightly dubious practice unless for the purpose of re-mutualisation or re-privatisation in full ...

    Hey! Let's be careful out there, whenever ...

  • Comment number 71.

    57. At 10:02am on 02 Mar 2011, Up2snuff wrote:
    re #51
    "Bryhers is right. Snuffy's feeble brain recalls that the QE requirements were for the banks and other financial institutions (yes, there are many others) to use the QE money to 'buy and hold' gilts. I cannot recall for sure but assume that in extremis, the banks (and others) would be allowed to borrow for liquidity against these securities and in extreme extremis, possibly, to sell them in order to remain solvent."

    The BOE is the one buying,the member banks are selling which increases their liquidity.They have money to lend.

    The problem is no-one is borrowing,the member banks are increasing their reserves,ie.deleveraging.

    If there are unused resources in the economy,an increase in liquidity should increase demand according to monetarists.Hasn`t happened, which suggests it should be done in combination with fiscal measures, where the government goes out with a pocketful of smackeroos and slaps it on your mythical counter.




  • Comment number 72.

    Stephanie, given that it is nearly impossible to explain the difference between our own CPI X and CPI y as both measures utilise different proportions and baskets of commodities it is not surprising that there are anomalous results when the Eurostat results were taken as a basis for the comparison.
    With regard to food price inflation being higher in the UK than in the rest of Europe.
    I think we should perhaps return to GCSE/ A level geography rather than economics for the answer to your conundrum and look at the food purchasing behaviours of UK consumers and the sphere of influence that large super markets chains have over large areas of the UK. Undoubtedly UK planning policies and UK consumers purchasing behaviours of processed foodstuffs will be major factors in explaining the difference in input costs and consumer pricing.
    If the price of food is 12% higher in the UK than in similar countries in Europe ( I have to say that this is not my experience ) then this would suggest that either our base costs are higher or our distribution efficiencies are worse or our supermarkets chains are operating at higher profit margins than their European counterparts ..all of which I would have thought those cleaver people at UBS could work out.

  • Comment number 73.

    Considering that food,it's production, distribution and consumption are the basis of all economic activity, it is amazing that we appear to have so little knowledge or control over the major factors that influence it.

    On a global basis, we do not appear to undertsand exactly what is happening in the commodity markets and why. We can track the continual increase in food commodity prices but the same old 'excuses' (demand and weather) are trotted out as explanations. However, there appears to be little to no analysis of exactly where this extra demand is coming from. The BRICS are often cited but no real figures are produced and I have seen little analysis of the true impact of what and by how much this extra demand is affecting the supply train. We always have climatic events that impact the supply chain. Have there really been a major increase in these events to the degree that price has been so dramatically restricted?

    Add to that the 'power'of the commodity markets themselves. Many analysts both here and in the US have asked themselves where investment banks generated the profits to recover their positions so quickly. Many have suggested that commodity market activity has been a major profit generator for them - including food.

    Domestically, we have to look at the shape of our food chain. When you concentrate power in the chain as we have in the UK then true competitiveness goes out of the window. The fight between tha major supermarkets is not truly a marketing fight. It is a corporate battle using short term merchandising techniques to give the appearnace of competition. All we are seeing is the same type of fake competition that we have recognised in gas and Electricity and rail services.

    The sum of all of these factors is that we have no control and inflation is a necessary outcome.

  • Comment number 74.

    @71. bryhers wrote:

    "The BOE is the one buying,the member banks are selling which increases their liquidity.They have money to lend.

    The problem is no-one is borrowing,the member banks are increasing their reserves,ie.deleveraging."

    -------------------------------------------------------------------------

    Yep banks are having to respond to the regualtion trend requiring higher capital requirements and lower risk holdings. So they need to not lend and to reduce longer term loans ... the anti-bank regulation tightening may go too far and too quick and kill any growth, and of course any increase in lending due to QE (parhaps MK and the BoE/MPC aren't able to think of two things at once).

    They probably cannot think of three things either, very strange how David Miles (at least from media reports - I haven't seen full speech) recognises that putting up interest rates could increase GBP and bring down inflation, but that this wouldn't be the path to follow because later easing would then be needed.

    So to the unitiated, such as me, it seems that the unelected experts are presenting a policy of - quick on regulation despite the growth downsides, but slow on interest rate rises despite the inflation. Perhaps the target has been stagflation all along?

  • Comment number 75.

    Good post @ #13 on NR's current Blog ...

  • Comment number 76.

    67. At 11:06am on 02 Mar 2011, Corrado Blaise wrote:
    >18. At 4:52pm on 01 Mar 2011, BluesBerry wrote:
    I place the blame onto the shoulders of BEN BERNANKE, the Federal Reserve Chairman of the United States.
    >
    I totally agree and have been saying the same for a while now.
    US QE1 took out all the bad mortgage debts the banks were holding. QE2 gave them extra cash to play with. Rather than lending to businesses for investing in growth they have speculated on commodities for a quick return.
    For proof see food commodity price trends, they all start to go up around Jul/Aug 2010, the start of QE2.
    The likes of Germany and China warned of high inflation but the US persisted as they would be partly isolated from food inflation as they produce so much of the worlds foods. The UK has relied on food imports since before WW2 and is not so fortunate.
    It is time for the UK to invest in food production and to become a little more self sufficient.
    "Dig for Victory!"

    .....
    Seconded. I believe this is the real source of inflation

  • Comment number 77.

    Happening now, as revealed by R4's You an Yours:
    Water companies seeking higher charges due to increase in RPI ...

    What comes around, goes around ... and around ...

  • Comment number 78.

    Much of the troubles brewing in the Middle East are being exasperated by speculative trading, particularly in oil.
    http://bit.ly/hzjOYE

    The spivs also have their hand in the food bowl.
    http://bit.ly/crcXMV

    The only markets left for the banks to squeeze money out of are from our basic needs.

    We in the west have gotten to be very good at stirring up conflict in the Middle East when needed. Ever ask yourself why?

    I highly recommend the excerpts from Michel Chossudovsky's 'The Great Depression of the XXI Century' posted here
    http://bit.ly/es1ZQ0

  • Comment number 79.

    @64. At 10:36am on 02 Mar 2011, writingsonthewall wrote:

    Ta for link. Yep. Forget the cookbook. You've just helped me find my next career move. Thank you.

  • Comment number 80.

    @69. At 11:09am on 02 Mar 2011, bryhers wrote:
    -----------------------------------------

    "There's a market there for a cookbook using worthless tat. A small selection of my specialities:
    Flatscreen bourguignon, DVD terrine, blackberry marinade, iphone stew......
    I intend to charge more than you for my culinary expertise....."

    Disgustingto: Put me down for a copy.

    ----------------------------------------

    Right. That's one firm order from ~50 bloggers....translates into roughly 2% market penetration. So if we assume 5% user coverage (30 million users) I'm looking at a first production run of.....hmmmm....about one and a half a million copies. Get them made in Ireland. They've got a cheap workforce. Flog 'em for 10 quid each. I'll do 100 production runs of a million copies, bundle them up and use them as collateral for a 100 million quid advance paid offshore into a brown paper bag by a subsidiary of a holding company set up by someone else's missus to raise capital for a gold mining venture that doesn't exist yet (and almost certainly never will). If the worst comes to the worst, use 'em for bog paper. I'll just buy a yacht, Porsche and well fortified villa in an undisclosed location on the strength of it all.

    Hope I'm learning?

  • Comment number 81.

    #77 uptosnuff

    "Happening now, as revealed by R4's You an Yours:
    Water companies seeking higher charges due to increase in RPI ..."

    My water bill has gone from £294 last year to £378 this. Now that's what I call inflation...

  • Comment number 82.

    66. At 11:00am on 02 Mar 2011, Squarepeg wrote:
    63. At 10:35am on 02 Mar 2011, Straightalk
    'if China were not purchasing approximatly 30% of the US debt'

    It would not be able to sell its productive output into the US market. I doubt that the fed really sees the surplus value of Chinese output being stored in dollar denominated accounts with the US government as a problem, why would it? (Unless the US decided to somehow settle the difference in bullion or some other US sourced commodity)
    ____________
    I agree that the Fed is probably more than happy that China is holding a recently revised up figure of US$1.6 Trillion of US securities as reported in the WSJ yesterday and that this partly reflects the trade situation between both countries.
    However, my point was that if China was still a closed economy along with the USSR, then the US would have to look elsewhere both to export products and to raise buyers of its government debt. Given the relatively sick state of Europe (setting aside Germany and parts of the Nordic region), then I was suggesting that the US might find it harder to raise the level of funds we have witnessed to support their debt binge. This would in turn put pressure upon the Fed to raise interest rates to attract fund purchases, which would clearly be an unsavoury position for Ben Bernanke, who seems wedded to the idea of keeping interest rates at their record lows until such time as he sees stronger signs of recovery.
    In other words, the US would have much less room to manoevre in such a situation.
    For this reason, I think that comparisons to the situation of the recession of the 1970s and early 80s is somewhat tenuous, since the structural geo-economics I referred to in my previous comments have changed the nature of the playing field very dramatically; notwithstanding that certain economic principles will still clearly apply.

  • Comment number 83.

    I have to laugh at some of the comments. Sterling has fallen by over 20% against a basket of currencies?! Really? Not in any time frame which is affecting annualised inflation.

    One question for Stephanie on Eurostat, is how they handle promotions in their calculations. I suspect by looking at single pack price and ignoring multibuy deals. Given these promotions have been increasing markedly over the last 3 years (to the point where over 40% of supermarket sales are on promotion), wouldn't this more than compensate for the gap UBS are proposing exists.

  • Comment number 84.

    #9 - most food is zero-rated for VAT

  • Comment number 85.

    Who knows Stephanie? How do MPs and MEPS meet their food bills? Ooops, they claim them from the tax-payer funded allowances - whether they need to or not.

    As for the rest of us, and our British farmers and British fishermen...?

  • Comment number 86.

    @59, nautonier:
    "What matters is most is how many people have a job... that means taxes paid and things being brought and sold ... and savings... and economy depends on as many people as possible having a job and having ability to pay. Britian's success or failure is primarily dependent on the number of British people it can get working in real sustainable jobs"

    At last, someone has understood! There's no point in buying 'cheaper from abroad' or even 'better from abroad' if the ultimate consequence is that you have no means with which to buy anything from anyone.

    Would someone please tell UKGov. Or did they finally work it out and that's why they saved the banks? I don't think so.

  • Comment number 87.

    81. At 2:31pm on 02 Mar 2011, Co-operateordie wrote:
    #77 uptosnuff

    "Happening now, as revealed by R4's You an Yours:
    Water companies seeking higher charges due to increase in RPI ..."

    My water bill has gone from £294 last year to £378 this. Now that's what I call inflation...
    ------------------------------------------------------------------------
    Good news! Er, sorry! Bad news. That was under the 'no increase/limited increase' arrangement negotiated by OFWAT. {Cough. Splutter.} That runs from 2009-2014, I understand. The Water Cos. now want an increase (presumably a substantial one) and are starting to negotiate acordingly for the next round - 2014/19.

    Now, what was that about a bonfire of the QUANGOS ... ?

  • Comment number 88.

    @83, TrojanOtter wrote:
    "I have to laugh at some of the comments. Sterling has fallen by over 20% against a basket of currencies?! Really? Not in any time frame which is affecting annualised inflation."

    Between the last months of 2008 and the end of 2009 Sterling fell from a 1.4-1.5 Euros to 1.1-1.2 Euros. For some time prior to and since that period Sterling has been relatively steady. There were similar changes in the pound relative to the Dollar and Yen. This is presumably the 20 % mentioned. There was not an immediate 20 % increase in prices in the UK. Perhaps, depressed demand and the need to maintain some sales prevented that. However, sooner or later, in a country that imports most of its food and consumer products, prices have to rise to match the devaluation of Sterling.

    If I am wrong, please explain to me where or how the 20 % devaluation is absorbed.

  • Comment number 89.

    btw to any posts that imply that food is VAT zero-rated? Get real.

    If you purport that food is zero-rated for VAT - then you are deluded or attempting to delude the rest of us of our understanding of the commercial/distribution costs of the food chain in the UK.

    VAT costs are included throughout the food chain/distribution system and passed on to the end-user - the consumer who shops for that food. We all pay for VAT on food - one way or another.

  • Comment number 90.

    #83 TrojanOtter,


    "One question for Stephanie on Eurostat, is how they handle promotions in their calculations. I suspect by looking at single pack price and ignoring multibuy deals. Given these promotions have been increasing markedly over the last 3 years (to the point where over 40% of supermarket sales are on promotion), wouldn't this more than compensate for the gap UBS are proposing exists."


    It's not quite as easy as that. Look a little deeper and find out who is actually funding those multibuy offers. Surprising how little it is actually costing the supermarkets!

  • Comment number 91.

    #86 WolfiePeters

    "At last, someone has understood! There's no point in buying 'cheaper from abroad' or even 'better from abroad' if the ultimate consequence is that you have no means with which to buy anything from anyone."

    Even allowing for the higher price of domestic coal the import price was lost to the economy whereas the domestic price circulated in pubs, shops, taxes etc and was ultimately cheaper in macro-economic terms. This was the Miners' argument. Unfortunately the government didn't meet it with rational counter-argument but with the truncheons, horses, boots and fists of Maggie's boys in blue. I wonder what alternatives to rational argument they are preparing as we speak...

  • Comment number 92.

    Stephanie, your blog makes no mention of the current world food shortages. Extreme weather over the last couple of years has had a massive impact on world food shortages, notably failures of massive rice crops in China, cereals in US and pretty much everything in Australia and South America. This food shortage is one of the driving factors of revolutions being seen in the Middle East and North Africa. It would be interesting to see UK unprocessed food inflation vs Egypt (world's largest importer of wheat), India (recently released emergency onion rations) and South Korea (US likely to offer food aid). The selected few you chose were (I believe) net exporters of food.

    If you think that food inflation has been bad so far - lets see what happens in the next 6 months when the frost that killed everything in December begins to be felt on the supermarket shelves.

  • Comment number 93.

    89. At 4:20pm on 02 Mar 2011, corum-populo-2010 wrote:
    VAT costs are included throughout the food chain/distribution system and passed on to the end-user - the consumer who shops for that food. We all pay for VAT on food - one way or another.

    My VAT knowledge isn't perfect but as food is zero-rated everyone in the chain can reclaim their VAT costs. It's the final consumer that pays (or not, in this case) all the VAT. Value ADDED tax.

    Isn't this the case ?


  • Comment number 94.

    re #89 & #93
    If importers/transporters/wholesalers/manufacrurers/distributors, etc., have equal-ish inputs-outputs then VAT is not really a factor. Adding complication, some items/components in the chain may be non-VATable, anyway. What is inescapable are the non-VAT transport costs: duties, taxes and charges.

  • Comment number 95.

    If the more recent European report on the matter of differentials in UK food pricing in supermarkets found similarly to the OFT investigation a decade or more ago, then it appears that little has changed since then, despite this being public knowledge. It seems that the "Rip-Off Britain" campaign changed little.

    If land hoarding by supermarkets is a part of the problem, then this is a matter that the OFT could investigate as part of a wider sector "market" review, directly, or following a super-complaint from the Consumers' Association (CA). Those who feel strongly about this should perhaps write to the CA, or "Which?" to you and me. The power for the CA to make a super complaint is there to be used, but it relies on consumers making complaints to them.

    Maybe the CA could publish a weekly goods shopping basket price list from all the major chains, so consumers could buy where it is cheapest more easily?

    The CA, OFT and Competition Commission cannot affect the underlying causes of commodity prices feeding through, via imports, but if there is profiteering going on, dressed up as imported commodity price inflation, then action may be taken.

  • Comment number 96.

    #54 bryhers wrote:

    "Output is indeed subdued. The fact that output is subdued but demand is booming is only "puzzling" if you believe all the old Keynesian nonsense. Artificial demand stimulation just causes inflation, not growth."

    You`ve really got me there old scout.If demand is booming and output subdued where`s it all going? Can`t be exports because the terms of trade have turned again us,ie.we are running large deficits on current account.


    The additional demand is going on IMPORTS (hence the huge and growing trade deficit) and on HIGHER PRICES. And not on increased output in the UK.

  • Comment number 97.

    The traditional analysis ignores non-tradables while evaluating the impact of changes in value of currency on imports and exports. However,non-tradables like properties-residential and commercial- become attractive for foreigners with devaluation of currency.So property prices are likely remain stable or go up even during recession. This is likely to impact general price level indirectly. However,some economists have to dirty their hands to unravel the various processes in operation. So, please look at the role of this often overlooked factor to solve your puzzle.If you look at behaviour of property and food prices in countries in your sample,you might find it quite revealing. Please go ahead, Steph and let us know what find

  • Comment number 98.

    What's more expensive? A 1 billion pounds investment in a local supplier of a locally developed public works project (by the govt), or 10x 100million pounds investments in cheaper public works projects supplied by foreign firms?

  • Comment number 99.

    Its hard to say but the intelligent and well spoken Mervyn King is unfortunately incompetent and should be sacked and replaced. The effect on UK inflation resulting from the increase in commodity and food prices has been caused in part by the fall in sterling which was caused by the reduction in UK interest rates in the first place. So its not really credible to talk about outside influences. It is just not intellectually credible to talk about this being the "wrong kind of inflation" or to shrug your shoulders and say "inflation will come back to target by itself in the medium term" (or paraphrasing - its not our problem guv and were not going to do anything about it). The public doesnt buy it, nobody buys it and the main problem is that the lack of cohesiveness in the hawk lobby as compared with the business lobby.

  • Comment number 100.

    Adam Collyer.

    "The additional demand is going on IMPORTS (hence the huge and growing trade deficit) and on HIGHER PRICES. And not on increased output in the UK."

    You are confusing demand with price inflation of imports.There are signs that retail demand is static or declining,this leaves unused resources,sometimes called an output gap.

    The trade gap has widened because we export products in a devalued currency, and buy products with deflated currency.Higher raw material costs add to this imbalance.

    There is no booming demand,there are booming prices.

 

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