Is the inflation genie working his way out of the bottle?

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People of a certain age will be familiar with the phrase, “letting the inflation genie out of the bottle”.


Well, the old genie seems to be loosening the bottle stopper pretty enthusiastically at the moment.


Most central bank policymakers are hoping that the economic conditions that are causing inflation to spike are temporary.


European Central Bank President Christine Lagarde, interviewed last week by business television network CNBC, put most of the blame on supply disruptions and she is expecting (or hoping?) the inflation rate will stabilise next year.


“When you look at what’s causing it, a lot of it has to do with energy prices,” Lagarde said.


Energy prices fuelling inflation


She’s not wrong there. Since mid-August, the price of Brent crude has shot up from around US$65 a barrel to US$84.42; a year ago it was priced in the low 40s.


Meanwhile, the wholesale prices of gas and electricity have gone through the roof this year (see charts below) for a number of reasons; one is the cold winter in Europe, which depleted stockpiles, while another is the economic recovery following the lockdown, which has seen increased demand, especially from China.


The gas shortage problem is particularly acute for the UK, which is one of Europe’s biggest consumers of natural gas. Most households in the UK use gas to power their central heating systems while gas is also used to power stations that provide around a third of the nation’s electricity. On top of that, nothing is more British than complaining about the weather and so it is no surprise that renewable energy suppliers have been grumbling about the least windy summer since 1961, according to the BBC.


If it is a sensationalist headline you are after, billionaire Sir Jim Ratcliffe, the founder of manufacturing leviathan Ineos, has provided one, saying a prolonged cold spell in Britain could lead to industry shutting down.


In an interview with presenter Robert Peston, warned about the lack of gas storage facilities in Britain.


Claiming the UK has supplies to cover around 10 days of usage, Ratcliffe said gas is “a very strategic and important requirement for the UK economy and they [the Government] need to ensure that the UK economy can’t be held to ransom because we haven’t organised our gas situation very well”.


“Ten days’ storage is a bit pathetic really for a nation as important as the UK, on the continent they’ve got 40 or 50 days’ storage,” Ratcliffe said.


The Times newspaper said “a senior Whitehall figure” revealed that the government is looking at measures to prevent a potential crisis in which factories are forced to shut down.


“There is not a huge amount of time to get this sorted,” the official said.


Around 500 small firms are set to find out their energy bills will rise from 3p per kilowatt-hour (KWH) to 12p per KWH, according to the BBC, after energy supplier CNG wrote to its customers saying it would no longer supply the wholesale market.


The BBC said the price increase will mean the annual energy bill of a typical small business will increase to GBP12,000 from GBP3,000 with immediate effect.


Not dreaming of a White Christmas as chickens come home to roost


So, maybe no one is dreaming of a White Christmas as the last thing the UK needs is a cold snap, but will we even have a Christmas at all, given that food companies have been hit hard by a shortage of supplies of carbon dioxide (CO2)?


Earlier this week, the government agreed to subside the reopening of a CO2 plant on Teesside owned by US-owned fertiliser firm CF Industries.


The gas is used in food packaging before they are slaughtered.


The laws of supply and demand suggest that shortages will increase prices and that certainly seems to be the case in the chicken market, where Ranjit Singh Boparan, the founder and president at 2 Sisters Food Group and owner of Bernard Matthews, says rampant inflation combined with the continuing lack of labour will ultimately result in higher prices.


The Chancellor of the Exchequer, Rishi Sunak, has promised “there will be a good amount of Christmas presents available for everyone to buy.”


He didn’t say people would be able to afford to buy them but that’s another matter; his response was in response to a question posed about a report logjam of cargo in Felixstowe and other supply chain issues.


“We’re doing absolutely everything we can to mitigate some of these challenges,” Sunak said.


Meanwhile, not a (working) day goes by without at least one company making a stock market announcement that makes reference to supply chain “challenges”.


For example, today discoverIE Group PLC said it is managing the problems effectively, although it conceded supply issues had somewhat constrained growth.


QinetiQ Group PLC (LSE:QQ.), meanwhile, warned it is experiencing technical and supply chain problems on a large and complex programme.


The defence group said if the problems are not mitigated it might need to perform a one-off write-down to its short-term guidance.


A flight to the land of plenty? It will cost you


All of which makes the average Briton contemplate getting away from it all.


Good luck with that, as Willie Walsh, the former boss of British Airways owner International Consolidated Airlines SA has blasted European Union proposals to force airlines to use a higher proportion of sustainable aviation fuel.


This will permanently bump up flight costs for passengers, said Walsh, who now bangs the drum for the International Air Transport Association.


And there’s the rub when it comes to central bankers’ expectations that the inflation rate will stabilise once things normalise.


The inflation rate is a year-on-year measure of price changes; if it falls to zero, that does not mean that the huge price hike that took place 12 months and one day ago did not happen.


Prices are ratcheting up and it may be that they ain’t coming down again in a hurry.

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