Monday, January 12, 2015

UK inflation release this morning | The effects of food and motor fuel

This morning, at 9:30 GMT, the Office for National Statistics (ONS) will release Consumer Price Index (CPI) and Producer Price Index (PPI) figures in the UK. Like all major economies, Britain is seeing reducing inflation, mainly driven by lower energy costs.

The received wisdom in the Forex markets is that if this tendency is reinforced yet again today, it will reduce the pressure on the Bank of England to raise core interest rates, with a concomitant reduction in the estimate of when the Pound Sterling will recover from the pronounced swoon it has been experiencing, particularly against the US dollar.

The effects of food and motor fuel  

The ONS has produced an interesting graph (shown above), which points up the added influence of food prices to the fall in inflation. While lower energy prices, represented here by motor fuel, have been a major factor since 2009, food prices have only been dropping since mid 2013.

There is no doubt that energy is a part of the cost of production of food, but there has also been a major price war in large food retail outlets in the UK and Ireland. In this the food producers (mainly farmers), who occupy the part of the supply chain with the lowest market power, have been squeezed by both the food product processors and, in particular, the supermarkets.

The graph above indicates that what has been apparent on the ground with regard to the cost of foodstuffs for some time is now official.

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