Hot milk: what rising prices tell us about inflation


Do you understand what a pint of milk prices? It’s a query designed to catch out out-of-touch celebrities and politicians. In these instances of inflationary froth, central bankers — and due to this fact markets — would possibly wish to concentrate, too.

Prices for milk, one of the of primary of commodities, are surging. That issues not just for customers, however for these of us after an indication of how sticky inflation might be.

Milk has historically proved stubbornly proof against inflation. Farmers and processors have to maintain margins at a minimal in the event that they wish to promote their wares to the grocery store behemoths, that are underneath stress from low cost retailers.

These market dynamics — and the truth that we’re now consuming extra dairy-free options — meant that within the UK from 2008 till lately the typical value of a pint had been as flat as a glass of the stuff at 42p. Over the previous yr, nonetheless, it’s leapt by 40 per cent to 59p. That would possibly nonetheless sound like small change. But for a staple that the typical individual drinks three of every week, it’s fairly staggering for some.

It’s an identical story elsewhere. In Germany, prices are up by virtually a 3rd over the previous yr, whereas the price of a gallon within the US has risen by 15 per cent since January.

So what does the hovering price of a pint of milk tell us about the character of inflation? And how a lot of the latest spurt has its origins within the supply-side shortages that emerged in the course of the pandemic?

That we’re seeing it occur in such a aggressive market highlights how embedded value rises have grow to be.

The price of two of the largest inputs for dairy farmers — feed and fertiliser — are up 83 per cent and 179 per cent respectively over the previous yr, in keeping with the UK Agriculture and Horticulture Development Board. “With farm input costs rising so significantly, dairy processors have had to pay more to ensure farmers don’t reduce milk production too much,” says Patty Clayton, the trade physique’s lead dairy analyst.

The conflict in Ukraine has exacerbated supply-side inflation. The media highlight on Russia’s invasion has additionally meant the rise in prices has not solely been painful, however seen — an important issue that has helped processors go them on to retailers.

Joanna Konings, a senior economist at Dutch financial institution ING, says the truth that this has occurred, after years of robust negotiation with supermarkets, “shows us just how strong the current rises in input prices are”.

Some enter prices are actually falling, nonetheless. Among them is the price of oil, which is significant all through the availability chain. “The milk is collected from farms all over the place in tankers so they are using fuel, then processing the milk takes energy as it involves heating it. Then there is the cost of delivering lorry loads of milk and cheese and butter by road,” says Maggie Urry, who used to cowl the dairy trade for the Financial Times.

Droughts throughout the northern hemisphere might have minimize brief the height milk-producing “spring flush”, weighing on output. But, with the price of commodities broadly down in latest months, milk value pressures may need peaked.

I believe, nonetheless, that will probably be some time but earlier than the spillover results work their method by the availability chain.

When doing their weekly store, individuals discover inflation in two methods. The first is that if the price of a staple they purchase typically goes up. You might or might not know what the worth of milk is, however I very a lot doubt you’d be capable of tell whether or not that bottle of Tabasco sauce you buy twice a yr prices extra now than it did in the course of the winter.

The second is that if the worth of a basket of products rises. Andrew Porteous, a client and retail analyst at HSBC, says: “Everybody has a few items that they know the price of, but what most of us notice is what we pay at the checkout, when we go: ‘Oh my, I’ve spent 55 quid this week rather than 50.’”

Supermarkets — eager to not be outdone by the discounters which have robbed them of market share over the previous decade — “want to make sure that the price of their baskets is competitive”, provides Porteous. They try this by tending to lift prices solely of merchandise purchased sometimes.

Milk is so ubiquitous that even Mark Carney, the previous Bank of England governor who was as close to to rock star standing as central bankers get, knew what the worth of half a gallon was. Couple that with a rise in the price of the typical store and what now we have is a really seen rise in inflation.

That visibility issues quite a bit. It’s more likely to not solely affect the expectations of customers and companies about the place prices might be this time subsequent yr, however make calls for for increased wages and will increase in the price of different merchandise all of the extra credible. How are you able to bemoan paying a farmer extra while you’ve felt the pinch your self?

The rise within the value of a pint appears to be like to me like a portent of inflation’s stickiness. I’d warning towards these market bets that financial policymakers will quickly pivot away from rising borrowing prices. Instead Carney’s successor, Andrew Bailey, and his central banking counterparts elsewhere must sit tight whereas value pressures, from provide chain to grocery store shelf, play out.

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