What The Rising Cost Of Bread Means For Interest Rates

[munimula]

The markets are waiting with bated breath for the release of minutes from this month's interest-rate setting meeting later this week.

The decision by the Bank of England's Monetary Policy Committee to hike rates is unlikely to have rested on a knife-edge - but the main focus will be on how likely the MPC is to raise again.

The quarterly inflation report released last week - and Mervyn King's hawkish tone - suggested strongly that rates will be 5% by the end of the year.

And the latest inflation data suggests that even that could be too low...

Manufacturers are continuing to push the rising cost of raw materials through to customers. The latest batch of producer price inflation data showed that UK factories raised prices for the seventh month in a row in July.

Output prices are up 2.8% on last year. That’s down from an annual increase of 3.4% in June, but that was largely because inflation rose strongly in July last year too. Raw materials prices rose by 9.6% in July, down from 11.5% the previous month.

As Alan Clarke at BNP Paribas told Bloomberg: "Output prices have been rising steadily as manufacturers are able to pass on higher costs. This could feed through to consumer price inflation."

This is the Bank’s main worry - that rising cost prices will start showing up in prices on the high street, and people will start demanding higher wages to pay for it all.

The Bank's fears may be well-founded. Although official statistics still show annual wage inflation standing at less than 4%, a survey of recruiters earlier this month found that wage growth had accelerated to its fastest rate in more than a year.

Certainly, the Bank will unnerved to find out that the price of one of the most basic consumer staples - bread - is about to rise.

Hovis and Mother's Pride maker RHM, which bakes around a third of the UK's bread, is hiking prices by more than 4p a loaf due to rising energy and flour costs.

The move comes as two of the UK's biggest millers, Rank Hovis and ADM Milling, said they will raise the cost of flour from September because their own energy and raw material prices are also rising.

Rank Hovis is actually owned by RHM, while ADM Milling is owned by US food giant Archer Daniels. Between them, the two companies produce about half of the UK's flour. ADM said energy prices have risen 30% and wheat prices by 15% in the past nine months.

Wheat prices have been heading higher, due to dry weather, which has sent wheat stocks to 25-year lows. According to ADM, Ukraine, Russia and North America have all seen lower-than-usual harvests due to drought.

(Those interested in investing in soft commodities may be pricking up their ears at all this talk of rising grain prices. We wrote about the sector in MoneyWeek earlier this month – subscribers can read more by clicking here: Why soft commodities are booming (http://www.moneyweek.com/file/16534/why-soft-commodities-are-booming.html))

The big supermarkets haven't said how they will react to the price rises. But it's yet another bit of pricing pressure that they may find difficult to absorb completely, as they face their own rising energy and wage costs.

Suffice to say, a 5% interest rate by Christmas looks more and more likely.

[jp1]

Bread? Just use good ol' hedonics and

Let them eat cake!!

[munimula]

Bread? Just use good ol' hedonics and

Let them eat cake!!

[Guest Alright Jack]

The yawning gap between the PPI input and output speaks volumes about the whole process of sanitising data for public consumption. Rampant corruption and spin.

PPI = producer price index.

At the ONS there are two measure for input and output. The input is running around 13%. The outcome is magically only around 2% (That is just not possible in the real world). It is just farcical. Although the output does exclude 'volatiles' (so presumably, it excludes everything that is going up - like with the CPI)

When a government feels it needs to go to such extremes of spin and lies concerning its national statistics, it suggests something very very dangerous is happening. Something that cannot get into the general public mindset.

What is that something? Is it a whole basket of issues? Why are being lied to so regularly and so comprehensively? What is it that they are so scared of?

[munimula]

The yawning gap between the PPI input and output speaks volumes about the whole process of sanitising data for public consumption. Rampant corruption and spin.

PPI = producer price index.

At the ONS there are two measure for input and output. The input is running around 13%. The outcome is magically only around 2% (That is just not possible in the real world). It is just farcical. Although the output does exclude 'volatiles' (so presumably, it excludes everything that is going up - like with the CPI)

When a government feels it needs to go to such extremes of spin and lies concerning its national statistics, it suggests something very very dangerous is happening. Something that cannot get into the general public mindset.

What is that something? Is it a whole basket of issues? Why are being lied to so regularly and so comprehensively? What is it that they are so scared of?

This is because companies have been absorbing the costs - but they can't do this forever.

As companies go bust or are shut down, Powerhouse, Allders, Link for example - there is less competition and the remaining companies will find it easier to pass on prices to consumers. Also, companies, particularly retailers are answerable to their share holders. They will only absorb costs so much, as Stuart Rose of M&S said recently. The time to start hiking prices is approaching.

This is what the BoE has to wake upto. The kind of inflation that has been building in the system will come out eventually. When it does there is a risk of a runaway wage inflation spiral - very hard to control. If that happens then interest rates below 5% will be a distant dream.

[pondlife]

"Small Brown Loaf of bread" is one of the items removed from the Inflation figures this year !!!!

The following have also been removed without replacement:

Orange Juice - Orange Juice futures have risen 60% this year

TV Licence - 29% rise this month

CD Player

The following have been included for the 1st time:

Champagne - Tax on Champagne was frozen this year (although not for wine)

Financial Services - International Transfer fees - Last year, in order to send money abroad, I had to go to my local branch and fax details of any overseas transfer. This year I use the internet. Can't see that increasing in price.

MP3 Players - Key here is that MP3 players are getting cheaper as technology improves data storage. Technology can't improve CD players above.

Flat Panel TV

Digital Camcorder

New items reflecting the services of fast fit auto centres

Nannying costs - aha - cheap immigrants

And they wonder why we don't smell a rat

[munimula]

"Small Brown Loaf of bread" is one of the items removed from the Inflation figures this year !!!!

The following have also been removed without replacement:

Orange Juice - Orange Juice futures have risen 60% this year

TV Licence - 29% rise this month

CD Player

The following have been included for the 1st time:

Champagne - Tax on Champagne was frozen this year (although not for wine)

Financial Services - International Transfer fees - Last year, in order to send money abroad, I had to go to my local branch and fax details of any overseas transfer. This year I use the internet. Can't see that increasing in price.

MP3 Players - Key here is that MP3 players are getting cheaper as technology improves data storage. Technology can't improve CD players above.

Flat Panel TV

Digital Camcorder

New items reflecting the services of fast fit auto centres

Nannying costs - aha - cheap immigrants

And they wonder why we don't smell a rat

It is trully incredible.

Champagne in but orange juice out. How on earth does that represent the average shopping basket? Are you telling me that all around Britain people are now sat at their breakfast tables with a bowl of cornflakes and a glass of champagne

As was pointed out in an Independent article today - nobody believes the CPI measure anymore and if people dismiss this official measure they will also dismiss it as a sufficient measure for their pay rises. This will put more pressure on wage inflation, something for the BoE to think about. If people dismiss the CPI figure as irrelevant then it will be even harder to control inflation using this as the target.

[Ah-so]

Just to clarify,it is a "multipack of pure orange juice" that's been removed, which I take to be the long-life stuff. Not surprising really, most people buy fresh stuff these days.

The removal of the TV licence fee appears incredible. Everyone needs that so we are all affected by its price. Considering that a "Child's swing" is in.

Sign of the times:

Out: girl's dress

In: girl's trousers

[munimula]

Just to clarify,it is a "multipack of pure orange juice" that's been removed, which I take to be the long-life stuff. Not surprising really, most people buy fresh stuff these days.

The removal of the TV licence fee appears incredible. Everyone needs that so we are all affected by its price. Considering that a "Child's swing" is in.

Sign of the times:

Out: girl's dress

In: girl's trousers

It is just wrong that items that the average family 'might' buy once in their lifetimes should be in the basket at all when items that have to be paid for every month are not even included.

This is why the CPI measure is becoming irrelevant. And when it is widely dismissed as irrelevant the BoE will be in a lot of trouble as they won't be able to control spiralling wage inflation as the link between CPI and wage inflation will be broken

[Smell the Fear]

So the price of bread (edible) may increase the price of bread (money, interest charged on).

[jp1]

Sign of the times:

Out: girl's dress

In: girl's trousers hijab

[The Colour]

The removal of the TV licence fee appears incredible. Everyone needs that so we are all affected by its price.

I don't need that. Neither do you.

[pooh]

I don't need that. Neither do you.

But you do.Or they fine you and send you to prison

[Pooh Bear]

But you do.Or they fine you and send you to prison

There's a Pooh already! Sorry, didn't realise.

Goodbye world

[bugged bunny]

I notice that the length of Tony Blair's nose is also not included.

[Guest Alright Jack]

This is what the BoE has to wake upto. The kind of inflation that has been building in the system will come out eventually. When it does there is a risk of a runaway wage inflation spiral - very hard to control. If that happens then interest rates below 5% will be a distant dream.

The wage inflation spiral doesn't exist - it is an invention by government to try to explain why prices are exploding. The truth is it is simply the rebalancing of the broader price structure that must occur in the latter stage of an inflationary cycle. This is the period in which all the over blown asset prices begin to leak some air and, because of the kind of system we have, the price of everything else sky-rockets untill some sense of equilibrium is restored.

The REAL costs of the inflationary years are delayed up until this point and are paid primarily by those holding any kind of paper. The wage increases are all part of the rebalancing.

It's amazing that people are so brainwashed by government that they actually belive, for example,

1) Rising wages, and

2) Falling prices

are BAD!

It defies all logic.

[the_duke_of_hazzard]

But you do.Or they fine you and send you to prison

I think his point was that you don't need a TV.

However, you don't "need" many things - you could live off mangos and nothing else. The vast majority of households have TVs, it is not regarded by society as a luxury, and it's a significant and regular cost. Why it should be removed is beyond me.