Wellian Weekly 29.06.2020

The return of inflation

Inflation in the UK fell to a four-year low last month. Year-on-year prices as measured by the Consumer Prices Index rose by just 0.5%. Sounds like inflation is something we don’t need to worry about right now.  However, a study that came out the other week that suggests it could end up being a much bigger problem that we might expect.

The study looked at data collected by a market research firm which surveys households regularly using receipts or data from barcode scanners. The results very clearly show that there has been a hefty rise in the price of fast-moving consumer goods during the lockdown period. Fast-moving consumer goods is all stuff you would buy in the supermarket every week – food, drinks, toiletries, cleaning products, and pet food. In other words, your grocery bills have gone up during lockdown. And the research suggests that the month-to-month inflation rate for groceries during the first month of lockdown was 2.4%.

For context, that is more than ten times higher than in the preceding months and was more than we normally get in a year. The majority of the spike happened during the first week, but prices still remain over 2% higher than pre-lockdown.

The researchers also found that more than half of the spike was down to a fall in the number of promotional deals (your buy one get one free deals being scrapped), something which the official statistics data doesn’t fully pick up on. Meanwhile, the range of products offered (and bought) fell by about 8%. Finally, regardless of what you were buying, you were paying more. In 2018 and 2019, about half of households saw their grocery bills fall during the first five months of the year. Put very simply – during lockdown, shopping basket prices have shot up in a way that we haven’t seen for years.

This was shown in last week’s results for the UK’s biggest supermarket chain, Tesco, who said that UK sales at established stores rose by 8.7%, online sales rose by 48.5% and sales in convenience stores jumped by 10%.

Of course inflation went up. Supply chains got disrupted, demand went up because people didn’t want to run out of stuff and because they didn’t have anything else to spend their money on.  It’s also about obstacles to effective competition too because we’re paying a premium for the convenience. It’s still hit and miss whether you can get an online delivery, and so we are taking trips to expensive but relatively empty convenience shops rather than sensibly planned visits to the supermarket, which is (still) always queued out the door.

So it’s entirely logical that inflation would go up. More demand, less supply, reduced intensity of competition, a sense of urgency among consumers – that’s a perfect storm.

So why does it matter? If nothing else, it shows that inflation still happens, given the right circumstances. The old rules of supply and demand do still function. Supermarkets are not going to suddenly embark on a price war when they’ve a) had to spend on hiring new staff; and b) had an opportunity to push prices higher; and c) are still at risk of weakened and more vulnerable supply chains generally.

At a wider level, while Covid-19 is going to affect demand – furloughing is one thing, but redundancies are coming through now, and they are longer lasting – it is also going to have an effect on supply. Lots of companies won’t be reopening and those that do will be offering fewer products and fewer services. That’s arguably more inflationary than not.

Markets are in no way prepared for the return of inflation. Even if it is unlikely, they’re really not pricing it in as much of a risk, and that’s a problem. Because even the most ardent inflation sceptic would have to acknowledge that it is not out of the question. At a time when financial markets expect the Covid-19 pandemic to be a disinflationary shock, this increase in the price of groceries suggests policymakers nonetheless should remain vigilant about the prospect of higher inflation.


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