VIEWPOINT: Food for Thought 

By Martyn Page, Investment Director, Worldwide Financial Planning

January 20, 2023

I HAVE recently returned from a Latin American country where corruption is endemic. It’s not just the bribes required by everyone from officials in high office to the local mayor - where it takes three years to resurface the main road into town and the job is not yet done. It’s there in the construction companies who outbid each other to get the contract. It’s there in the corporations who back politicians seeking election. It’s there in the modern shopping complexes allegedly funded by laundry money derived from sales of a white powder that is definitely not Persil.

It’s also there in the wealthy gated communities where people regularly ignore the planning rules designed to keep the place looking neat and simply build extra rooms. Forget councils. These breaches of civil law are down to the local police to enforce. But police salaries are so meagre that cops regularly shake down people for contributions to the Christmas Fund. So, guess what happens? 

But what about the residents’ committee, I hear you ask. Surely, they act to police the estate? Ha ha. No. The committees are stuffed with those very residents most desirous of breaching the planning rules. Corruption is even there at the individual level in the families who have corrupt relatives and yet don’t call them out about it. It’s endemic.

We are not at all like them, are we? Well, to the extent that people elect governments to provide more things that they are collectively prepared to pay for via taxes, are we so very different? Our desire to find ‘someone else to pay’ appears endemic.

Fortunately (or not) governments have a way of raising taxes that no politician has to vote for. It’s called inflation and it’s been in the news a lot recently, although the media calls it a ‘cost of living crisis’. Now, the government will tell you that inflation is bad and is the result of broken supply chains, Russian oligarchs, Arab sheikhs, grasping trade unionists and maybe even greedy businessmen. They will claim to have a plan to bring down inflation and go on television to reassure us about this. Yes, Chancellor Hunt, I mean you.

And while it is true that some businessmen are greedy and some trade unions are grasping, the root cause of inflation is when governments print too much money which ends up chasing a limited amount of goods. Just about every burst of inflation on record has been preceded by a notable rise in the money supply. Most recently, this happened in many countries early in 2020, including the UK.

When governments printed money in the wake of the Great Financial Crisis of 2007-08, many predicted it would result in a burst of inflation. However, like the money that was just resting in Father Ted’s account, that money remained within the financial system and did not enter the wider economy. So, we saw inflation in financial assets (shares, bonds, property) but not in commodities, food or services.

However, when governments printed money in the wake of Covid-19, the money went directly into the economy via furlough and other payment schemes. The money supply rocketed. The first big increase came in early 2020 and then continued steadily upwards. The next big step upwards occurred in September 2022 at exactly the time when the government first introduced an energy price guarantee. 

At the risk of sounding like Mrs Thatcher, things have to be paid for. But very few politicians are brave enough to tell voters that taxes will have to rise to pay for furlough, energy price caps and perhaps significantly higher public sector wages. You could even argue that we elect them to not tell us this.

Governments which borrow a lot need inflation to whittle away the costs of servicing and repaying those debts. This is best done slowly, ideally by stealth. In the medium term it is done by freezing and curtailing a wide range of personal tax allowances. In the long run, over decades, it is done by ensuring an acceptable inflation rate that does not scare the horses. 

All the main central banks pay lip service to having an inflation target and this is typically two percent because people are less likely to notice the depreciation of their money when it is done gradually. Inflation is a way of robbing old people (ie those on fixed incomes), slowly. 

At a time when government mouthpieces have repeatedly said that current public sector wage demands risk creating a dreaded wage-price spiral*, let’s take a closer look at the latest inflation numbers. 

In December, the annual rate of consumer price inflation ticked down a tad to a still worrying 10.5 per cent, while core inflation (which conveniently excludes the food and energy costs that disproportionately hurt low-income families) remained unchanged at 6.3 per cent. That’s a shade below current private sector wage agreements. As for the newspapers, many said whoopee inflation appears to have peaked. The reality is that things are merely getting worse more slowly.

Where was the inflation in the year to December? The main driver of higher prices was food and non-alcoholic beverages up an astounding 16.9 per cent. The government would like us to think this is due to higher prices for commodities, fertilizer and grain. But is it? 

In the first 10 months of 2022, UK consumers paid 19 per cent more for eggs, but farm prices rose only nine per cent. A supermarket chicken cost 15 per cent more but farmers got three per cent less. Lamb was 10 per cent more but farmers received 16 per cent less. Profit margins have been expanding along the food chain.

For those who are interested, the UN publishes a food price index. This peaked in March 2022 and has been falling steadily since. Meat, dairy, vegetables, cereals and vegetable oils are all down. 

If we are being charitable, we can say that these price falls have yet to work their way along the food chain. I wonder about that. US food giant Proctor & Gamble recently raised overall prices by 10 per cent in the final three months of 2022, while sales volumes only fell six per cent. Over half of P&G’s sales (Tide detergent, Tampax tampons) come from outside the US.

What about the UK? Overall, Christmas trading for retailers was at the upper end of market expectations, especially for those with physical stores. B&M, Sainsbury's, M&S, JD Sports and Poundland all had strong Christmas trading. 

Tesco reported UK food sales up 12.9 per cent this Christmas and 16.8 per cent ahead of three Christmases ago. I don’t know about you, but I wasn’t eating 16.8 per cent more turkey and mince pies than in 2019. Those higher sales reflect the margin-expanding price increases which have squeezed us all. Or, as Jingle Tills Tesco describes it, a ‘robust performance in an inflationary environment’. Even (adjective deleted under legal advice) M&S is to open 20 new larger, improved stores this year.

That said, we have been lucky. The El Nino effect predicted (accurately so far) that we would have a remarkably mild autumn followed by a much colder January, so our energy bills have been slightly less extortionate than expected. And the UK economy just about avoided outright contraction seemingly because of all the beer and food consumed watching the World Cup in pubs. Restaurants and hotels saw annual inflation of 11.4 per cent. But who can blame them for trying to make hay while the sun shone and France had not yet beaten England.

Not everything rose in price. Clothing and footwear prices were actually lower in December than November but that reflected the need to attract shoppers with discounts before the January sales. And that’s a signal of harder times. What might squeeze the profit margins of the food retailers? The steady drip drip of more and more people coming off low fixed-rate mortgages, for one.  

You might think that the coming higher monthly mortgage bills will show up in inflation. But you would be wrong. The Office for National Statistics’ preferred measure of inflation is CPIH (Consumer Prices Index including owner occupiers’ housing costs) and this ignores mortgage rates, house prices and things homeowners actually pay. Instead, the ONS uses rent, which conveniently rose a lot less than mortgage costs. About 19 per cent of households are occupied by private renters whereas around 67 per cent are homeowners. Quite simply, this measure does not reflect the cost of living for most people.

The issue remains that we have had a burst of double-digit inflation and it will take some time for people to see things get better. Perhaps the greatest unknown will be the price of energy as China’s economy reopens after three years of its zero-Covid policy. Well, we shall find out.

*The 1970s did suffer from a wage-price spiral because there were more, larger unions and a lot of them had index-linked wage agreements. That’s not the case today. 

Martyn Page is the Investment Director at Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority. 

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