Just back from a day trip to Guernsey to visit clients (and now realising that I have a pocket full of non-legal tender coins to dispose of somehow – perhaps I should melt them down for their nickel content, given the 150% rally in that metal’s price over the last year). The Bank had just written its “Dear Gordon” letter after the 3.1% CPI/4.8% RPI print, and inflation was the topic of the trip. In particular food prices came up time and time again, and they are worth a mention here. A big part of March’s upwards pressure came from food and non-alcoholic drinks, and milk in particular saw big price hikes, with the year on year rate looking huge thanks to aggressive price discounting a year ago. But other seasonal foods were also robust – and more widely people are becoming concerned about the recent rally in “soft” commodities.
It all comes down to the price of oil – in fact an old school friend who is a scientist in East Anglia for a sugar company says that the oil price is the first thing he looks at every day. This is because with petrol prices so high, it pays to convert food crops (corn, sugar beet etc.) to ethanol rather than see it end up in human or animal bellies. You can mix ethanol into petrol at a 5% level and it will work fine in your car, and in Brazil and Mexico many cars can run exclusively on the stuff. In addition large subsidies exist in the USA for ethanol production. So food producers and cattle farmers have to compete with the new ethanol producers and the price of grain has rocketed (causing riots in some poor areas of Latin America). The Independent is worth a read – it claims that using corn for ethanol production is misguided. It quotes an estimate that corn needs 30% more energy to produce (transport, fertiliser etc) that the fuel it produces, and that the grain needed to fill the tank of a car with ethanol would feed a human for a year. With food having roughly a 10% weighting in the inflation data continued price rises will have a significant impact. Also worth watching is the news of the Australian drought. The government there is considering turning off the nation’s Murray-Darling basin irrigation system if it doesn’t rain soon. This is home to 55,000 farmers, and it would devastate the nation’s agriculture and send food prices higher. As an aside Prime Minister John Howard doesn’t believe in climate change and didn’t sign the Kyoto Agreement. The last year has been the driest there in 115 years.