Inflation is worsening as food and oil prices soar.jpg

Inflation is worsening as food and oil prices soar

By BILL BLEVINS

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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

INFLATION IS becoming a growing threat on a global level as rocketing food and oil prices are pushing people into near poverty.

Basic food costs are being affected the most with the price of rice tripling in a year while wheat prices have doubled. Vegetable oil has also tripled. In turn, the price of staple food such as bread and pasta has risen at the checkout.

Grain shortages are forcing up prices as rice producing countries limit their exports to feed their own people. To make matters worse, rice importers are ‘panic buying’ and purchasing more than they currently need to stockpile in the event of supply drying up completely. Shortages are being blamed on poor harvests and increasing demand. Land which was used to grow crops is being given over to the production of biofuels to help counter climate change.

In the UK, food prices are at their highest level since World War Two. According to research by MySupermarket.co.uk, food price inflation has driven up the weekly cost of a basket of 24 basic items by 15 per cent over the past year. From April 2007 to April 2008, 250 grams of butter has increased by around 62 per cent, a dozen free range eggs by 47 per cent, 250 grams of cheese by 26 per cent, 500 grams of fusilli pasta by 81 per cent and one kilogram of basmati rice by 61 per cent.

The 15 per cent hike indicates that supermarket food inflation is seven times higher than the official UK Consumer Price Index (CPI) which stood at 2.5 per cent in March.

The standard basket of goods by which consumer price inflation is measured does not necessarily include the items that each individual or demographic group spend their money on. Some items in the basket of goods would not be the likely choice of the majority of retired people, and therefore many people’s personal inflation rate is different, and usually higher, than the official basket of goods.

For example, in the UK, recent changes to the basket reveal the increasing trend towards healthy eating as the smoothie soft fruit drink is added. Muffins are also included for the first time reflecting the popularity in today’s café culture.

Frozen vegetarian meals and microwave ovens were thrown out of the basket.

Music also has an influence on calculating the rate of inflation via the basket of goods. Top 40 singles CDs are out as consumers move towards downloading individual tracks from the internet.

Digital technology has also impacted the basket of goods in that 35mm camera film gives way to digital storage devices such as memory cards and USB storage sticks for use with cameras, mp3 players, mobile phones and computers.

In the Eurozone, the inflation rate was expected to drop to 3.3 per cent in April, having hit a 16-year high of 3.6 per cent in March, up from 3.3 per cent in February. Food prices had risen 5.6 per cent in March and energy was up 11 per cent. It is not just food and energy prices which are affecting Eurozone inflation, but the credit crunch, strong Euro, slowing global growth and financial market instability are all taking their toll. In both the UK and the EU, the inflation target is a mere two per cent.

Massive profits

Data issued by the European Commission reveals that only around two-thirds of the food price increase in Europe is down to the cost of ingredients. Between February 2007 and February 2008 the price of bread rose by 10 per cent but the doubling of wheat prices should have caused only a three per cent increase. The price of milk, cheese and eggs increased by 15 per cent in the supermarkets but should have been lower at 12 per cent. Cooking oils and fat increased by 12 per cent but the cost of the ingredients should have meant an eight per cent rise.

“Energy, transport and labour costs have risen. But it is possible that somewhere along the food chain someone may be doing well out of this. We are not drawing conclusions; we are just presenting facts,” the Commission stated.

Retailers denied they are profiteering, pointing out that energy, transport, wages and rent rises all contributed to the escalation of food prices.

The price of oil is at a record high – 124 US dollars a barrel at the time of writing, up 99 per cent in the past 12 months. The president of OPEC, the oil producers’ cartel, Chakib Khelil, warned that the price could go to 200 US dollars a barrel as he blamed the weak dollar and geopolitical problems for the unprecedented prices.

Two giant oil companies, Shell and BP, were criticised for making massive profits although it was maintained they needed the money for re-investment. Motoring lobbyists estimate that the UK Treasury is raking in an extra 123 million pounds sterling a month more on VAT fuel than it did a year ago.

The International Monetary Fund (IMF) deputy managing director, John Lipsky, has warned that while he is “optimistic” there will not be a repeat of the early 1970s, when rising energy prices resulted in accelerating inflation, the risk “cannot be discarded out of hand”. He also advised that food prices will stay high for the foreseeable future.

The threat of inflation cannot be ignored and, to achieve personal financial survival, it is vital to ensure that your wealth is protected against inflation to safeguard not only the future spending power of your money for your retirement but also to maintain financial security for your heirs.