The cost of food and energy looks set to give inflation another surge

The economic story of 2022 so far has been one of inflation or “inflation,inflation,inflation” as Andy Haldane once told us when he was at the Bank of England. Indeed as I have mentioned him he deserves some credit for this from last year.

Chief Economist of the Bank of England Andy Haldane has warned the UK economy is starting to overheat and unless quantitative easing is withdrawn soon uncomfortably high levels of inflation will become embedded. ( PoundSterlingLive)

It is hard not to think that this is why he was moved onto pastures new. Also whilst I am in a reflective mood we had a spell where central bankers and US Treasury Secretary Janet Yellen assured us they had the tools to deal with any inflation. How is that going?

Commodity Prices

These were already high but developments around the war in Ukraine have pushed them onto another plain. Let us start with the energy complex. From the Washington Post yesterday.

The United States and other world powers have agreed to release 60 million barrels of oil from their strategic reserves, a move intended to reduce gasoline prices that have climbed rapidly in recent weeks, according to the International Energy Agency.

How has that gone?

OIL PRICES SURGE MORE THAN $5 PER BARREL AFTER RELEASE OF SUPPLIES FAILS TO CALM MARKETS -AP ( @FXHedgers)

Oh. In fact the price of Brent Crude Oil futures has passed US $111 per barrel this morning. This has all sorts of impacts around the world as it is an all-time high in India for example. Also it will be having an impact around Europe.

Oil prices in EUR terms have surged above €100 per barrel, more than 60% (!) above the levels projected by the ECB in December. ( @fwred )

Some of the latest move will be stop losses being triggered but for now we face the prospect of a range of higher prices from this starting with fuel and an example of that is being seen in shipping costs.

“Freight rates for Middle East to Asia are higher too, so it depends which one is more painful,” a Singapore-based trader said.

“Freight everywhere is increasing, ( Reuters)

We can now switch to gas prices.

EUROPEAN BENCHMARK TTF NAT GAS JUMPS >55% TO NEW ALL-TIME HIGH OF €194 PER MWH ( @JavierBlas)

So a winter of records in this area sees yet another one. Indeed we can go further via the tweets of Faisal Islam of the BBC.

NEW UK wholesale gas price now back up to 397p a therm, close to freakish peak in Autumn, had settled below £2 before invasion, normally 60ishp. Pushes up avg price, if sustained further household bill rises in Autumn of hundreds of pounds, on top of record rise in next few weeks

A little later this morning.

NEW UK wholesale gas prices top £4 per therm again

Then

NEW UK Wholesale gas prices top £4.50 a therm – a record… Up £2 in 24 hours from already elevated levels.

Care is needed as these are likely to be stop loss trades at the peak (a search for the word gamma something from my previous life as an options trader provides a clue) but there has been a move higher.

There is an irony here because in a way we have sanctioned ourselves. This is because buyers have been turning away Russian crude oil contributing to this. I doubt those baying for sanctions thought this through. But for our purposes we have higher inflation and also an economic downgrade for countries who import energy. India and Japan come immediately to mind as does the Euro area. The UK too although we produce some of our own.

The cost of food

The issue of wheat prices has become a hot one as you can see. From Karen Braun of Bloomberg.

Most-actively traded Chicago futures surged to $10.23 per bushel in overnight trade into Wednesday, the highest since March 2008, but they are well off the highs at time of post (around $10). Wheat has traded higher in only 34 other sessions, all in Feb-March 2008.

If you are looking for context she has helpfully provided that too.

For context, most-active CBOT #wheat futures around the same date in recent years (per bushel): 2021: $6.60 2020: $5.25 2019: $4.60.

The wheat issue is due to the fact that more than a fifth of the world supply and 29% of exports comes from Russia and Ukraine combined. But other food commodities are also on the rise.

March 1: CBOT #soybeans settle at $16.90 per bushel, the most-active contract’s highest since Sep. 2012. No sunflower oil shipments out of top exporter #Ukraine spells extreme tightness for global vegetable oils. CBOT soybean oil & Malaysian palm oil screamed to new records Wed.

The Bloomberg commodity spot index rose by 4.1% yesterday to an all-time high which is so far being exceeded today. So we move on singing along with Glenn Frey.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

The Consequence

We can see that from this week’s developments and we can start with Germany which regular readers will recall had a more than 1% negative push on its annual inflation rate from the VAT changes falling out of those numbers.

+5.5% on the same month last year (provisional)
+0.9% on the previous month (provisional)

So it did not fall and here is the official explanation.

Corona-related effects, such as delivery bottlenecks and significant price increases at the upstream economic levels and for energy products, continue to have an impact here .

That was a contributing factor to this from this morning.

Euro area annual inflation is expected to be 5.8% in February 2022, up from 5.1% in January according to a flash estimate from Eurostat, the statistical office of the European Union.

If we look at the breakdown we see that every category is rising.

Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in
February (31.7%, compared with 28.8% in January), followed by food, alcohol & tobacco (4.1%, compared with
3.5% in January), non-energy industrial goods (3.0%, compared with 2.1% in January) and services (2.5%,
compared with 2.3% in January)

Comment

There are a lot of chickens coming home to roost here as we note the confidence of hubris of central bankers and their claims they could easily control inflation. How is that going? The reality is that because of the contractionary impact of this we saw longer-term interest-rates plunge yesterday. I do not expect them to have expected a war but they left us increasingly vulnerable to any shocks and it was their gamble but our loss.

Another example of this has come from the UK earlier and the Nationwide Building Society and the emphasis is mine.

The price of a typical home rose above £260,000 for the first time in February, an increase of £29,162 over the past 12 months. This is the largest ever annual increase in cash terms since the start of our monthly index in 1991. The price of a typical home is now £44,138 (20%) higher than in February 2020 – the month before the pandemic struck the UK.

This is another area of inflation and central bankers around the world made the same move and created another area of inflation. It was pre-planned as we note the establishment effort to keep such manoeuvering out of the official inflation numbers.

Things are so bad they are even reaching that bastion of no inflation Japan. From Asahi TV.

Seven-Eleven has raised the price of some sandwiches such as egg sandwiches and renewed the packaging in response to the soaring raw material prices…….The price of this Seven-Eleven sandwich will increase by about 5% to 12%.

Apparently it is all too much for the usual tricks.

Until now, in the convenience store industry, there has been a movement of so-called “steres price increase” to reduce the content of products without changing the price of bento boxes.