Why the 22p egg may signal three more years of pain

SPIRALLING food prices have triggered a record inflation hike that makes an interest-rate cut increasingly unlikely for hard-pressed borrowers.

Last night, experts warned the painful squeeze would continue, with inflation not dropping to the government's 2 per cent target before 2011, despite the recent fall in oil prices.

The Consumer Price Index (CPI) has hit 4.4 per cent, driven up by dairy products, after the largest monthly rise since records began.

The hike means the Bank of England will be loath to deliver the cuts in interest rates desperately needed to kick-start the property market and revive a flagging economy.

It has also prompted union calls for wage rises – which experts say are undesirable, as they lead to more cash sloshing around the markets, further fuelling inflation.

The figures, from the Office of National Statistics (ONS), show food prices driving the CPI up from 3.8 per cent in June. Michael Saunders, of Citi analysts, said: "In all, we expect CPI inflation to rise to about 5.7 per cent year- on-year in August, as household energy prices rise – even though oil prices are lower – reaching about 5 per cent year-on-year by year end. Thereafter, even with the recent drop in global commodity prices, and the likelihood that the UK economy is in recession, we expect CPI inflation to stay above 3 per cent until quarter three next year, staying also above the 2 per cent target throughout 2009 and 2010."

Vicky Redwood, of Capital Economics, highlighted a sharp rise in core CPI inflation – which strips out energy and food impact – from 0.3 to 1.9 per cent. She said it was evidence of wider inflationary pressure on top of energy prices and meant a cut in interest rates "within the next couple of months looks well off the agenda" as the Bank tries to damp down price growth.

Official inflation has been above the government's 2 per cent target since October last year. It is also above the 3 per cent rate at which the Bank has to write to the Chancellor explaining the discrepancy.

The largest upward effect came from food and non-alcoholic drinks, which rose 12.3 per cent in the year to July. That contributed just under half the monthly 0.6-point rise. Within that grouping, bread prices surged 15.9 per cent, meat products by 16.3 per cent and milk, cheese and eggs by 19 per cent. There were also significant rises for electricity and gas – both running at 12 per cent higher than a year ago – and fuels and lubricants, which surged more than 25 per cent ahead.

Energy bills fell this time last year, exacerbating the current inflationary impact. Oil price rises continued to exert a major influence last month. Crude peaked at more than $147 a barrel in the second week of July, before retreating during the following month. Prices have since fallen by about a quarter.

Among the fallers were clothing, down 7.3 per cent, footwear, which dipped 2.5 per cent, and second-hand cars, down 5.7 per cent. But the ONS said the data showed the levels of discounting normally seen in the summer sales were not as big as last year. The Retail Prices Index (RPI), which includes mortgage payments and is commonly used for wage-bargaining and pension payments, reached 5 per cent in July, up from 4.6 per cent and the highest level since July 1991.

Brendan Barber, the general secretary of the TUC, said: "It is vital that pay rises keep pace with inflation to ensure that our standard of living is not slashed over coming months. Better pay would also improve consumer confidence and lessen the chances of a long and deep economic slowdown next year."

Paul Kenny, general secretary of the GMB union, said action was essential to tackle "profiteering oil firms, (or] it is inevitable that wages will have to rise in response to these higher prices".

Yvette Cooper, the Chief Secretary to the Treasury, said that the government was trying to mitigate the effects of the global economic downturn, but she acknowledged that there was a limit to what it could do in the face of rising world commodity prices.

'Shell-shocked' by rocketing cost of basic commodity

BEFORE now Donald Peddie, a farmer for more than 40 years, had put up the price of his eggs only once in ten years.

In the past year, however, he has increased prices three times – by 4-8p a go.

And for Mr Peddie, the owner of Kilduncan Farm, Kingsbarns, Fife, nowhere are the stark effects of the global credit crunch on consumers' budgets more apparent than in the humble egg.

The Office of National Statistics Consumer Price Index shows the staple increasing by 19 per cent year on year as hard-pressed producers are forced to pass on rising costs to the supermarkets.

Spiralling costs of commodities – fuel and, predominantly, feed – have left the producers living, as one put it, "hand to mouth".

Because the egg is such a basic foodstuff, not subject to the impact of a processing chain, it is immediately affected by any change in commodity costs.

The major expense for producers is feed for their chickens and they estimate this has gone up 50 per cent year on year.

Other increases have included packaging, going up due to the energy costs required to dry out wood pulp to make egg boxes.

Mr Peddie agrees his price rises are largely due to the increasing costs of feed and fuel.

He particularly feels the pinch of the latter, as he delivers directly to his customers in two vans which are out on the road five days a week.

He said: "Certainly everything has gone up hugely. Feed went up a huge amount last year, from about £146 a tonne to £220 a tonne. The transport situation has had a huge impact on us as well. We are paying about £300 a month extra on diesel."

He added that customers seemed to be "shell-shocked into accepting price rises at the moment".

Mike Darrah, general manager of Noble Foods in Scotland, said producers had little control over their costs.

He said: "We have no way of controlling that – either the cost of the grain or the amount we feed the birds. The birds have to be fed and that is our biggest issue."

The saving grace for the larger producers – and the reason why the price of eggs has spiked – is that supermarkets have swallowed the increased costs.

If they had not, many livelihoods are likely to have been lost.

Mr Darrah said: "It has been extremely difficult. Although the supermarkets have moved they generally moved a bit behind the prices we have had to pay.

"We have ordered food in advance, knowing we would lose money if they did not move. It has all been hand to mouth."

He said he did not believe the extra costs had sent any producers out of business, but for those looking to leave the sector they would have been the "final straw".

However, other farming sectors have been unable to pass on the extra outlay and are struggling.

Anna Davies of NFU Scotland said: "Pig farmers are suffering huge losses because they also have huge inputs and the marketplace is not matching that in terms of farm-gate prices, so they are making losses. The eggs guys are just about staying afloat.

"It comes back to the supermarkets in the end – there is this imbalance of power within the supply chain; the supermarkets are at the top wielding all the power and farmers have very little negotiating power and get railroaded by the supermarkets.

"At the moment, we are seeing efforts from supermarkets to keep their shelf prices down so they can keep their customers happy."

ANALYSIS: This is only a staging post on the road we'll stagger along for at least two more years

Bill Jamieson

SOARING food, dearer petrol and huge price rises for gas still to kick in: the latest inflation surge is less a peak than a staging post to even worse problems – for the government, the Bank of England and households.

The jump in the Consumer Price Index last month from 3.8 to 4.4 per cent was not only much worse than analysts feared, but was also the biggest monthly change and to the highest level since records for this measure began in January 1997.

It leaves the government fighting a desperate action to hold down wage settlements, as the CPI is set to hit 5 per cent by the year-end. Central to that battle is keeping down inflation expectations. But with the index rising by the month, these expectations can only rise. Indeed, the official measure significantly understates the real inflation pain being felt by households.

The Retail Price Index – the headline rate of inflation and the one most commonly used for wage bargaining – has already surged from 4.6 per cent to 5 per cent. Prices of frequently purchased items are now rising at an annual rate of 7 per cent. And food inflation has surged further – from 10.6 per cent in June to 13.7 per cent in July.

Both in scale and in breadth, this inflation surge is no temporary "blip".

Citigroup economists expect the CPI to hit 4.7 per cent in August, climb to 5 per cent by the year-end, to stay above the 3 per cent "letter-writing" level until the third quarter of next year and to remain above the 2 per cent target throughout 2009 and 2010.

The immediate threat for the government is a big push on public-sector wages. This would pose a double danger, first by adding to the inflation spiral and second by pushing the public finances even further into the red than they are already.

Both the government and the Bank of England are now in a policy box and with no easy means of escape. In "normal" circumstances the Bank would drive up interest rates to check inflation. But a recession looms. And higher rates now would send the housing market into an even more severe plunge.

The hope is that the oil price will fall further. Brent crude has already come down from its peak $147 a barrel to $111 yesterday. But there is no certainty this fall will prove permanent. It will not shield the UK economy from knock-on or "second-round" effects in the pipeline.

The one "policy" left is to let the recession run its course (with a few modifying measures in the Pre-Budget Report) in the hope that it will bear down on inflation and enable rates to be cut. But this will be painful and it will take time – hardly a message that will go down well with public-sector unions or mutinous Labour MPs.

Number of houses bought and sold plunges

HOUSE prices in Scotland are still rising, but the number of purchases has dipped sharply, a new report reveals today.

A "modest increase" of 1.6 per cent over the past three months has brought the average cost of a home to £172,185, according to the Lloyds TSB Scotland house price monitor.

However, the number of homes being bought and sold has dropped by 27 per cent.

The bank's chief economist said latest figures, for the three months to 31 July, demonstrate the Scottish housing market's "traditional resilience".

Professor Donald MacRae told The Scotsman: "The fall in transactions is an effect of the credit crunch, and I guess some people are just waiting to see what happens next.

"However, in terms of prices, the Scottish housing market is reverting to type when you compare it with a few years ago.

"The bottom line is house-price increases are at a level much nearer inflation, which makes for a much more sensible and sustainable market."

The report shows that, across Scotland, the average price of flats is down 1.7 per cent to £134,050, with detached properties down 1.2 per cent to £260,684.

Meanwhile, terraced properties are up by 5.5 per cent to £141,666 and semi-detached homes are up by 7.2 per cent to £176,833.

Prices in Dundee have fallen for the second consecutive quarter by 5.2 per cent.

Glasgow prices began to plateau over two years ago, and the latest price movement is almost static, showing a quarterly price increase of 0.6 per cent.

Edinburgh prices rose for the third consecutive quarter, with an increase of 1.9 per cent.

FOOD AND NON-ALCOHOLIC BEVERAGES
• UP 12.3%

ALCOHOLIC BEVERAGES AND TOBACCO
• UP 4.3%

CLOTHING AND FOOTWEAR
• DOWN 6.7%

HOUSING, WATER, ELECTRICITY, GAS, OTHER FUELS
• UP 7.6%

FURNITURE AND HOUSEHOLD EQUIPMENT
• UP 2.8%

HEALTH
• UP 3.3%

TRANSPORT
• UP 8.0%

COMMUNICATION
• DOWN 0.7%

RECREATION AND CULTURE
• DOWN 0.1%

EDUCATION
• UP 13.2%

RESTAURANTS AND HOTELS
• UP 4.1%

MISCELLANEOUS GOODS AND SERVICES
• UP 2.8%