The information below is from Collidr and we wanted to share it with you as this example shines a light on how painful real inflation is for the finances of the general public and how strained the financial system is (high national debt levels often lead to more inflation in future). Inflation continues to weigh on consumers and the market, as illustrated by the price of beef in the chart below:
Key points
- UK food inflation is currently running close to 5%, and for such a significant and regular purchase, it’s something consumers are acutely attuned to, as is the Bank of England.
- Yet this is just the average rate for food inflation, masking a wider dispersion of inflationary pressure that occurs at the till for some consumers. Year on year, beef is up an eye-watering 25%, so it’s probably no wonder that supermarket steaks now come served with their own security tags.
- The reasons for this are complex, but viewers of ‘Clarkson’s Farm’ will be familiar with the challenges that British farmers face. A slump in UK beef production is behind the price surge, as more and more cattle farmers have exited a troubled industry – faced with higher costs, more red tape, fewer abattoirs, and declining demand. For some, the inheritance tax increase was the final straw.
- But this isn’t merely about your supermarket or restaurant visits costing more—it’s also yet another headache for the chancellor.
- An increase in grocery costs soaks up additional disposable income, and much of this is zero VAT rated. Pre-Covid, VAT revenues were running at around 2%-5% in real terms, but now they are close to -1%, due in part to a greater spend on zero rated items, such as food.
- That VAT shortfall is yet another factor adding to the budget black hole.
If the government can’t balance the books, investors will want a higher return (or yield) for holding Gilts.
With 20 year Gilt yields higher than they were when Liz Truss was prime minister, there are signs that that
is already happening but investors should certainly be on the lookout for any further creakiness in the Gilt
market. Oh, and I wonder what will be the next food item to get a tag in the supermarket?
Sources:
Collidr, Bloomberg. Indices: Barclays, FTSE, Bloomberg, STOXX, Japan
Exchange Group, MSCI, S&P, New York Mercantile Exchange, Chicago Mercantile
Exchange, Bureau of Labour Statistics, US and Office for National Statistics, UK.
