Lead Time On Energy Costs Feeding Into Cpi

[DoubleBubbleTrouble]

Had a very interesting discussion with someone who happens to work for a large construction company t'other night and I happened to ask how rising energy costs affect their business.

Their reply was that it had a massive impact primarily on concrete costs and also on all the other fuel costs. However it takes time to feed through because all the contracts are negotiated on a 6 month, 1 year or 2 year basis.

That got me thinking how long will it actually take for increased energy costs to really filter through to the CPI. Likes of Tesco must have energy contracts on a yearly basis which will only really start to bite into costs soon.

Anyone have any thoughts on this?

Edited May 26, 2006 by DoubleBubbleTrouble

[AteMoose]

yes

[the_duke_of_hazzard]

yes

Didn't the 70s' oil shock take about a year to have any discernible effect on the economy?

[karhu]

Had a very interesting discussion with someone who happens to work for a large construction company t'other night and I happened to ask how rising energy costs affect their business.

Their reply was that it had a massive impact primarily on concrete costs and also on all the other fuel costs. However it takes time to feed through because all the contracts are negotiated on a 6 month, 1 year or 2 year basis.

That got me thinking how long will it actually take for increased energy costs to really filter through to the CPI. Likes of Tesco must have energy contracts on a yearly basis which will only really start to bite into costs soon.

Anyone have any thoughts on this?

Of course, inflation is "pent-up" there is no question. However, retailers are passing it onto consumers in crafty ways, which may mean that hedonic adustment will remove some of its effects. Our standard of living is getting degraded and people are working harder and longer hours than ever before :angry: .

[Sisyphus]

it's the larger companies like Tescos who will decide. They probably have long term contracts and hedges in place. When these expire they will most likely past on the cost thru to the consumer. The smaller businesses will tag along - at the moment they have to take it on the chin or go bust.

[FreeFall]

Of course, inflation is "pent-up" there is no question. However, retailers are passing it onto consumers in crafty ways, which may mean that hedonic adustment will remove some of its effects.

I'm not so sure this is the case....sure, some suppliers are passing costs on, but mostly from what I can see on the high street the prices are pretty stable - especially within the big chains.

I think inflation may see a strong blip upwards when the costs have to get passed through. Unless of course they just change the CPI basket weightings again that is....

[CrashConnoisseur]

'Sainsbury's energy bill rises £75m':

http://www.telegraph.co.uk/money/main.jhtm...8/cnsains18.xml

J Sainsbury tried to calm fears that it would be forced to pass on escalating energy costs to shoppers, after its chairman suggested the company could not absorb all of its hefty fuel bills.

Finance director Darren Shapland said: "We know that if we lower prices, sales go up. If we increased prices we'd lose momentum and traction and we're not going to do that."

The supermarket was warning that its energy bill had tripled, increasing £75m, as a four-year, fixed-price contract came to an end.

Mr Shapland's comments came just moments after the chairman Philip Hampton warned that rising energy bills were a serious threat.

Mr Hampton said: "It's hitting all businesses. The question is, do businesses contract or do they get it passed on as inflation? And when you look at supermarkets, you're looking at businesses with very thin margins."

Sainsbury's operating profit margin edged up last year from 2.07pc to 2.24pc.

The company later tried to smooth out any contradictions between the two positions, but Mr Hampton made it clear that if higher costs weren't passed on, "retail profit margins will be hit".

[HousePriceLottery]

Way I see it sooner or later something has to give;

1. Prices have to go up

or

2. Companies have to take it on the chin and accept lower profits.

Call me a cynic but I suspect option 1 will be their choice...

[ToilAndTrouble]

Of course, inflation is "pent-up" there is no question. However, retailers are passing it onto consumers in crafty ways, which may mean that hedonic adustment will remove some of its effects. Our standard of living is getting degraded and people are working harder and longer hours than ever before :angry: .

Tenuous anecdote this, but I notice Subway have stopped their loyalty stamp program... effectivley a 12.5% price increase to those who use it. Also, there's been a very large increase in the number of restaurants adding service onto bills.

Neither of these appear in the CPI.

T&T

[OzzMosiz]

Tenuous anecdote this, but I notice Subway have stopped their loyalty stamp program... effectivley a 12.5% price increase to those who use it. Also, there's been a very large increase in the number of restaurants adding service onto bills.

I love Subways!

[karhu]

Also, there's been a very large increase in the number of restaurants adding service onto bills.

That's exactly what I was alluding to. Since when have we been expected to pay service charges in UK? However, you can notice more forcefully worded comments on menus requesting an extra 10%, but you get nowhere near the lever of service that is provided in the US, for example. Also, workers in the UK are salaried - in the US waiters have to derive all of their income from tips. This service charge thing seems to be a way that restaurants can pay their staff a pittance.

Also, I see many special offers are being removed. Products are being subsituted by lower standard products. This is all reducing the amount we get for our money. At the end of the day gold cannot undergo hedonic adjustment and the price of gold has been speaking volumes recently.

[BuyingBear]

Anyone have any thoughts on this?

Yup, to start with any price blips are constrained by inventories and contracts which act as a buffer, in the interim you see 'temporary' surcharges, as the higher prices persist the costs are eventually passed on and there is a multiplier effect as contracts are reviewed and everyone takes their hit. It passes through the chain until it hits the consumer, then you feel the full weight of secondary effects in the inflation data.

Many retailers and energy intensive users are currently negotiating new energy contracts, many were on 5 year deals signed when there was intense competition between suppliers and energy was cheap, back then oil was under $20 bll and companies like British Energy, Drax went bankrupt and had to be bailed out.

You see it all over the place, these price rises will be passed on.

May 17 (Bloomberg) -- J Sainsbury Plc, the U.K.'s third- largest grocer, posted an unexpected decline in second-half profit and said rising energy costs may hurt earnings this year.

The shares had their steepest drop in 22 months after Chief Executive Officer Justin King said the cost of energy will be 38 percent higher in the second half than Sainsbury had expected. Net income dropped 84 percent to 6 million pounds.

It's like shaking a bottle of coke, it may look sublime from the outside but somebody will open it eventually and it's not going to be pretty.

[OnlyMe]

Copper price increases are just now going through the systems (at the local distributor level). Trade prices of copper electrical cable form one supplier went up 12% on each of three separate days last week. Material cost increases like these will be passed straight on to the end customer.

[dnd]

'Lead time' relating to recent increases? - retailers have been supressing energy inflation for quite a while anyway so as not to affect sales numbers

However, as energy prices continue to rise they will have to pass this increase onto the consumer and this will feed into real inflation (not the Govenment figure)

And to think, this energy crisis stuff is what we read in textbooks back at school....

[Nick T]

I love Subways!

Same here,

Chicken and Bacon Ranch with sweetcorn and mayonnaise

[BuyingBear]

And to think, this energy crisis stuff is what we read in textbooks back at school....

Indeed, Alice Through the Looking Glass

[El_Pirata]

Way I see it sooner or later something has to give;

1. Prices have to go up

or

2. Companies have to take it on the chin and accept lower profits.

Call me a cynic but I suspect option 1 will be their choice...

It goes more like this:

1. Prices have to go up

or

2. Companies have to take it on the chin and the weaker ones go bust. Now there is less competition, it is easier for the surviving companies to do 1.

[FTBagain]

It goes more like this:

1. Prices have to go up

or

2. Companies have to take it on the chin and the weaker ones go bust. Now there is less competition, it is easier for the surviving companies to do 1.

Absolutely right. I've argued this for sometime on here.

Rising energy cost will first manifest themselves as increasing job losses and bankruptcies as firms struggle to control their costs. No one wants to be the first to put up their prices because they loose customers to their competitors.

We have been seeing both jobs and bankruptcies rising for months now. Prices may have just started to rise as well now. The Central Banks will raise rates to counter this, increasing the pain. The weeker or over leaveraged companies will go to the wall, reducing competition. Those that remain will find it easier to pass on the costs, leading the banks to raise rates further.....

A vicious circle and it looks like it is starting to close.

[DoubleBubbleTrouble]

I've always suspected many of those involved have regarded the energy rises as a "temporary blip" hence they can just try to weather the storm. I think it's fair to say that it's looking more and more like prices will stay higher than expected now. I wonder if this sentiment will feed through soon as well.