Mr Whippy has 99 problems but Brexit is not one of them
You could say that we save a bottle of Ketchup a minute. Shake a ketchup bottle and nothing happens. But eventually we will be covered in red sauce as the blockage is released. Something similar is happening in global supply chains right now and it’s impacting all of our lives.
Indeed, inflation has been the buzzword in recent weeks around the world. Households are experiencing an acceleration in both consumer and house prices. With the opening of hospitality, we are now being charged at prices that we have never seen before.
Social media has been torched by the price of drinks, including an example of Diet Coke costing £ 4. Being a designated driver may no longer save you money. But some tap and pay customers may not realize this until they check their bank statements.
Meanwhile, companies are reporting skyrocketing input costs such as rising transportation costs and rising raw material prices.
The United States recorded its biggest rise in inflation since 2008, with consumer prices rising 4.2 percent in the 12 months leading up to April. The UK saw the same measure drop from 0.7% y / y in March to 1.5% y / y in April. This represents the largest monthly increase since 2009.
Overall, UK price increases of 1.5% are still relatively moderate (for now at least), compared to the US. Part of the reason is that the temporary VAT cut last year temporarily lowered consumer prices in the UK.
If the tax changes are ignored, UK consumer prices rose 3.2 percent year-on-year in April. Scoring the highest inflation rate using this specific measure in NINE years.
The current ‘modest’ UK CPI rate hides steeper increases in some items. For example, heating oil has jumped 40% year over year. Meanwhile, the cost of a haircut has increased by over 9% and the price of a new bike has increased by 14% in the past 12 months. Motorized transport costs are also increasing.
The price of a liter of diesel recently climbed above 130p per liter. That’s almost 20p more than in May of last year. Meanwhile, oil prices rose 22 pence per liter – more than a fifth – over the same period.
It is not only the price of goods and services that is increasing, most asset prices, with the exception of Bitcoin, are too. Parts of Northern Ireland saw house price increases of 11% annually in the first quarter.
According to Ulster Bank’s Northern Ireland PMI, private sector companies reported their fastest increase in input costs in the survey’s 19-year history. And companies pass these costs on to their customers by also raising their prices at record rates.
Whereas manufacturing and service companies have experienced even higher inflation rates before. Construction companies and retailers have not. But Northern Ireland businesses are not alone. Construction industries around the world are in the same boat. For example, the UK construction PMI survey reported its biggest rise in input cost inflation in a generation.
The Bank of England expects consumer price inflation to rise above 2.5% later this year – and therefore temporarily above the Monetary Policy Committee’s 2% inflation target – before going back down.
The Federal Reserve shares a similar view that the spike in US inflation is transient. If this is correct, no central bank will need to respond by raising interest rates too quickly. Indeed, earlier this month, Fed Chairman Jerome Powell said the Fed “isn’t even thinking of considering raising interest rates.”
Remember that record interest rates, coupled with unprecedented fiscal stimulus, together provide a massive tailwind for economic recovery.
The recent rise in inflation is largely due to two factors. First, the past year saw sharp drops in the price of oil that translated into cuts in electricity and gas bills alongside gasoline and diesel. The robust global economic recovery has seen this trend reversed. The large increases are from last year’s weak base. For example, the price of oil in pounds sterling has tripled from the April 2020 low, but prices have only returned to pre-pandemic levels. What we have seen is a V-shaped recovery in the price level.
Likewise, when the temporary VAT reduction for the hospitality industry expires, the year-over-year increase will compare prices with different tax rates.
The second source of inflationary pressures is the disruption of global supply chains due to the pandemic. Turning the economy on and off has disrupted supply chains.
With global consumers unable to spend money on things like services (vacation, hospitality, etc.), they’ve splurged on consumer goods – from patio furniture to dumbbells.
There has been an increase in demand and an inability of supply chains to meet it. This has resulted in shortages in a range of global commodities or key items such as semiconductors and timber. There is a shortage of sea containers and the price of goods shipped from China to the United States is tripling.
The American economic boom leads to a real estate boom that consumes a huge amount of building materials. This has seen the price of lumber increase by 83% in one year.
The recent survey by Tughans and Manufacturing NI found that 37% of local manufacturers say disrupted supply chains are their biggest obstacles to growth in 2021.
In the construction industry, my concern is that the disruption of the supply chain will impact the construction of housing or the lack of. Limited housing stock and strong demand translate into continued upward pressure on prices.
Even Mr. Whippy was caught off guard with demand exceeding the supply of flakes. Clearly Mr Whippy has 99 issues, but Brexit isn’t really one of them. Rather, it is about not anticipating the level of demand.
But, coming back from Ketchup Flakes. As I said at the start, the blockages in the supply chain should unblock in no time. And related to that, inflation should be transient.
Central banks will tolerate a period of transitory inflation, but how long is this period transitory? In the meantime, even this kind of inflation will have impacts, including wreaking havoc on the construction industry in Northern Ireland. A series of projects have started, but some fixed-cost contracts will now appear undeliverable in terms of time and cost in the current environment.
Unfortunately, the new costs associated with Brexit are not transitory. We have heard that M&S has incurred £ 30million in new costs associated with the NI protocol. Vigorously shaking the NI Protocol bottle to get the ketchup – or swap it out – faster will make little difference. The harsh reality is that commercial ketchup will never move as well as it did before Brexit.
:: Richard Ramsey is Chief Economist for Northern Ireland at Ulster Bank