Preview: Wheat Price Spike To Have Limited Affect on UK Aug CPI

By William Wilkes

LONDON — Recent two-year highs in wheat prices are leading
to higher grocery bills for UK consumers, but should exert only a
limited degree of upward pressure on the UK’s latest inflation
benchmark, the CPI rate.

This, despite a summer of droughts, floods, wildfires and heavy
rains that will likely shrink the 2010 grain harvest around the world
and has resulted in crop failures of almost Biblical proportion in
Russia and Ukraine, Europe’s bread basket.

Rather, excess capacity and fierce competition on the High Street
will likely cool these food price woes, according to economists. The
annual UK CPI rate for August is forecast at a median of 3.0% year on
year, according to a poll conducted by MNI. The CPI rate has been above
the BOE’s target of 2% since December 2009, peaking at 3.7% in April —
the highest level since November 2008.

“Underlying price pressures should be contained by substantial
excess capacity, likely bumpy and overall gradual recovery, wage
moderation amid high unemployment and job insecurity, and the need for
retailers to price competitively in the face of fragile consumer
spending,” said Howard Archer, Chief UK and European Economist at IHS
Global Insight.

The CPI food price component has risen 1.7% since the start of the
year, and in one monthly retail index, the British Retail
Consortium-Nielsen Shop Price Index, UK food price inflation hit its
highest level since last July and drove overall shop price inflation up
for the month.

But these price pressures have yet to fully pass through the
wholesale chain, according to the Office for National Statistics’ latest
Producer Price Index.

And a wider MNI analysis of a number of retail, supermarket foods
shows that costs have indeed increased sharply on the month, but only
for a few grain-based products, like pasta, and not enough to
significantly influence the data.

For instance, the cost of 500g of own-branded, or generic, pasta
increased 10% on the month at Tesco and 9% at Asda, but remained flat at
Sainsbury’s. There were no price increases for branded pasta, suggesting
firms are not passing costs on to consumers.

The MNI data show the cost of a 500g box of corn flakes, a popular
breakfast cereal remained the same as in July, despite wholesale corn
prices reaching a 23-month high in August.

A kilogram of rice also costs the same at all major UK supermarkets
as it did in July, despite the Rice Price Index, which tracks 16 export
prices around the world, climbing to a five-month high of 215 points.

Also, none of these supermarkets saw increases in the cost of a box
of Weetabix, a palm-sized cereal that is 95% wheat and a staple at many
UK households’ breakfast table.

The cost of a loaf of bread was also flat on the month.

One grain industry expert said that stable flour and bread prices
are no surprise even with grain prices at multi-month highs.

“Actually, only 5% of the price of producing a loaf of bread is the
flour, most of the rest is energy and water costs, but that 5% will be
subject to big price moves,” said Ian Backhouse, Chairman of the UK
National Farming Union’s Combinable Crops Board.

In terms of fuel prices, MNI data show petrol prices edged higher
in August but base effects suggest they will have a small negative
impact on the change in the yearly rate of CPI.

The MNI Index shows petrol prices rose just 0.1% on the month in
August, having risen by 1.0% last August. That base effect entails
petrol prices will take 0.04 percentage point off the change to the CPI
12-month rate.

Also, sterling’s recovery from earlier lows, coupled with pressure
from the margin of spare capacity in the economy, will continue to lead
inflation on a downward path in the coming months, according to Allan
Monks, UK economist at JP Morgan.

“Smaller import price gains will help core goods prices to weaken.
The weaker currency appears to have had a major influence on goods
inflation in the UK. Since the currency has stabilized, import price
gains have moderated,” Monks said.

In terms of fuel prices, MNI data show petrol prices edged higher
in August but base effects suggest they will have a small negative
impact on the change in the yearly rate of CPI.

UK Aug CPI is forecast to come in at 3.0% year on year with the
RPI rate estimated at 4.6%, according to a Market News poll of analysts.

–London newsroom: 4420 7 862 7492; email: wwilkes@marketnews.com

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