Does mounting global inflation threaten economic recovery here? Bill Gleeson reports

SHOPPERS and motorist will tell you prices charged in the supermarkets and forecourts have been rising steadily in recent years.

In each of the last 12 months, UK inflation has been 3% or higher, remaining obstinately above the Bank of England’s (BoE) 2% target. The persistence of inflation in this country has taken members of the BoE’s Monetary Policy Committee (MPC) by surprise. The BoE had previously predicted that inflation would be less than half its current rate of 3.3% by now.

Many of these price pressures are imported, arising from economic conditions in other parts of the world.

Britain, though, is unique among G7 countries in suffering higher than normal inflation. Most of the rest of Europe and North America have experienced much lower levels of price rises. That’s not to say, though, that there aren’t concerns forming on the continent about prices.

Earlier this week, the European Central Bank president, Jean-Claude Trichet, made clear his view that this was not merely a UK problem but something that could begin to affect the rest of Europe, too. Speaking after a meeting of central bankers in Basel, Switzerland on Monday, Mr Trichet said: “This is no time for complacency and the solid anchoring of inflation expectations is considered something that is important by all of us.”

But the real problems lie farther afield. Inflation has a very firm grip in the emerging markets of Asia. According to figures published by the International Monetary Fund, China’s consumer prices are rising at an annual rate in excess of 5%, while the figure for India is hovering around 8%.

These figures reflect very strong economic growth. Both China and India are enjoying growth in economic output of around 8%.

The fear is that Asia’s high inflation will have knock-on consequences in the West.

Food and commodities are the biggest contributors to price rises around the world. The price of wheat, corn, sugar, meat, oil, cotton and other raw materials have risen to substantially in the past year as consumer demand soared in developing nations.

Indeed, some prices are at record highs and competition for the Earth’s resources is so fierce the United Nations (UN) last week warned that some of the world’s poorest people could soon experience food shortages.

UN Food and Agriculture Organisation’s chief economist, Abdolreza Abbassian said: “We are entering danger territory.”

Here in the UK, some economists have been warning that interest rates, the BoE’s principal weapon to fight inflation, have been unrealistically low.

Peter Stoney, an honorary senior fellow in economics at the University of Liverpool and a director of the Liverpool Research Group in Macroeconomics said: “The Macro Group takes the view that we should have an immediate increase of 0.5% in bank rates to get a signal out that the BoE is aware of this increase in inflation.

“If it does not increase the bank rate, it is giving an impression of not being in full control of the situation.”

The MPC has been trying to balance its duty to curb inflation with the need to stimulate the economy. Mr Stoney suggests, though, that should the economy falter as a result of a higher bank rate it can always be put back down.

“And there is also quantitative easing if things become dire,” he said.

“The markets need a signal that this increase above target inflation is unacceptable.”

He argues that the UK is particularly susceptible to inflationary pressures due to the relative weakness of sterling. Despite Mr Trichet’s warning about complacency, Europe’s inflation rate has been half of that of the UK till now.

Mr Stoney said: “The depreciation of sterling increases import prices.

“The UK needs to take advantage of the increased export potential offered by sterling’s depreciation to counter the effects of raw material prices going up. that will help reduce net trade deficit. Also, in the Eurozone, they have massive unemployment that is going to affect the demand side of inflation. UK unemployment has been resilient. Jobs have not been lost on the scale expected.”

One business that has seen the effects of inflation on its trade is Edward Billington and Son, based in Liverpool Cunard Building.

Among other products, the firm makes and distributes animal feeds, owns a sugar business in the US and sells spices and ingredients to supermarkets

Billington chairman Lloyd Whiteley believes price rises are caused by sharply rising demand compounded by some significant constraints on supply. He said: “If you project over the next five to 10 years, you may see food and energy shortages.

“If the population continues to grow, there could be another billion mouths to feed.

“Then you have the whole climate effect with foods and droughts and extreme weather patterns. The Russian and Australian drought have affected crop yields.

“The major crops round the world, corn, soya, sugar and cotton, have gone up enormously in the last year. Wheat was trading at £100 tonne on futures in summer, now its £200.

“Those products feed into everything we eat – bread, biscuits, cereals.”

Mr Whiteley says we have yet to see the full effects of inflationary pressures in agricultural markets. That’s because many food manufacturers have hedged against inflation. However, with futures contracts beginning to expire, many food firms are going to have to replenish their supplies by returning to the market and paying higher prices.

“Over the last six months, only part of that price inflation has been passed on to the end customer,” he said. “There’s always a long lag.

“We are at the start of the price and supply chain.

“We sell feed into the farming market and probably only passed on 30% of it. The rest of it will come in May, when we have to replace our forward contracts.

“Its inevitable you are going to get more food inflation passing through. The key issue is passing it on.

“On top of that, you have crude oil doubling this year. That is also fundamental. Energy costs are shooting up and energy is a huge input cost for manufacturing. Then distribution costs are also up. It will all lead to higher food prices.”

However, rising prices are not all bad news for Billington and other food firms. Anybody involved in trading commodities will see rising prices as an opportunity to improve their margins by buying cheap and later selling dear.

The trends have already affected the UK where the jump in food prices in November was the highest since 1976. Meat and poultry were up 1% and fruit by 7.5% in one month.

There are also additional pressures from rising demand for bio-fuels, particularly in America. More and more land is being given over to crops that end up as biofuels, meaning the supply of crops to the food markets is further constrained.

And all of this comes on top of the recent 2.5% hike in VAT. It’s going to be a tough 2011 for the MPC.