Inflation: Weekly Shopping Bill Could Rise 30 Percent By Christmas

Adrian Ash - Tue 11 Sep, 2007

Adam Leyland, editor of The Grocer the food and drink industry's favourite read says the cost of your weekly shopping bill could rise 30% by Christmas. It's already risen by 6% from this time last year. But as ever, it's somebody else's problem. "If I were [the chancellor] Alistair Darling or a pensioner, Id be very worried," Leyland says. Phew! Good job he's the editor of a weekly business-to-business magazine, eh? Your own correspondent confesses that he's terrified at the prospect of runaway inflation...

Adam Leyland, editor of The Grocer — the food and drink industry's favourite read — says the cost of your weekly shopping bill could rise 30% by Christmas. It's already risen by 6% from this time last year.

But as ever, it's somebody else's problem. "If I were [the chancellor] Alistair Darling or a pensioner, I’d be very worried," Leyland says.

Phew! Good job he's the editor of a weekly business-to-business magazine, eh?

Your own correspondent confesses that he's terrified at the prospect of runaway inflation... and yet he's almost entirely in gold, the only asset to preserve and grow its purchasing power during the runaway inflation of the late 1970s!

Maybe William Reed, publishers of The Grocer, have agreed to index-link Leyland's salary to the cost of Flora margarine. The bright yellow goo doesn't sell like it did when Terry Wogan recommended it to the nation's coronary arteries. But the price of a tub from Tesco still rose 41% last week according to The Grocer's data.

"Butter and spread prices are moving," as Leyland tells The Daily Star, because "in recent weeks we have seen milk prices lurch up." Supplies shrank dramatically last month thanks to the government-sponsored foot and mouth outbreak, coupled with the summer's flooding. "The situation is going to be very tight over winter," warns the
Milk Development Council. It says that butter stocks in the European Union are now 50% below last year.

It's not only lactose. Sainsbury's cheapest bag of apples just rose by 140% to nearly £1.20 per kilo. A loaf of Hovis bread now costs £1.04, rising from 96p. Analysts think another 5p or 6p rise is on the way, adds The Guardian.

"Dried spaghetti was up 10p [last week] in virtually all supermarkets," Leyland goes on. In Italy, the price of pasta has risen so fast that consumers are plotting a boycott on Thursday. The average Italian's weekly food bill has risen by 30% from last summer.

"We face three years’ inflation," wails Robert Schofield, chief executive of Premier Foods plc, maker of Oxo cubes, Typhoo tea and Angel Delight. Shares in the UK's biggest foods group have dropped a quarter of their value in the last three months. Premier blames high wheat prices on the growing demand for crops by the biofuels industry. Schofield calls the resulting inflation an "environmental tax on food".

"Over the past 30 years the cost of food as a proportion of disposable income has come down from 30% to less than 10%," notes the CEO. "It is going to edge back up."

Food prices are rising even in Japan, land of the falling salary since 1995. The price of instant noodles has just turned higher for the first time in 17 years, reports The Scotsman. Wheat futures traded as Chicago contracts, meantime, rose to a new all-time high in Asian trade today, more than double last September's price after adding nearly 9% last week on top of the 23% rise seen in August. Thanks to a hot wind sweeping Australia's wheat farms in late August, the US Department of Agriculture now says that global wheat stockpiles will fall to a quarter-century low by the end of May '08.

But in the glass towers of Canary Wharf, Wall Street and Frankfurt, investment-fund managers — like the editors of food-industry journals — must somehow be insulated from the rising cost of eating. Because US Treasury bonds, those fixed-income assets denominated and paid in US Dollars — the world's most-hated currency outside Zimbabwe — put in their best performance since 2003 in August

Perhaps the Western world's money managers are planning to get by on free biscuits and coffee, delivered by trolley to their meeting-room suites every time they start a new pow-wow. Right now, let's face it, there must be a whole heap of pow-wows going on, too. Investment bankers don't sack themselves, you know.

But what's this? While two-year US Treasuries returned 1.09% in August judging by Merrill Lynch's data, the amount of US bonds held by foreign governments and central banks at the Federal Reserve fell by nearly 4% — "the steepest decline since 1992," according to Bloomberg.

A straw in the wind? More look a bale of wheat. China had already cut its US debt holdings by 3.4% during the second quarter. Taiwan cut its holding by 10% in the year-to-June. South Korea cut its holdings by 25%.

Now the world and his broker expects the Fed to slash Dollar interest rates... despite a genuine upturn in the world cost of food. If you're still holding fixed-income investments today, gentle reader, you might want to consider what your bond manager would call the near-term outlook.

"The Fed needs to ease and will ease," says Paul McCulley, second-in-command at Pimco, the world's biggest bond fund. "Here's saying a prayer that 100 basis points of Fed funds cuts, by the end of 2007, will not be too late."

Your editor hereby invokes the spirit of St.Teresa of Ávila, patron saint of headache sufferers, once again. "There are more tears shed over answered prayers than over unanswered prayers," noted the Spanish mystic in the 16th century.

Because th e central banks got their wish after fighting to fend off deflation in 2003. Japanese and Italian food manufacturers have got their wish for better pricing power, too. Now fund managers looking to beat the credit crunch of 2007 are looking for a cut in US interest rates.

The Daily Reckoning bets they'll get it... good and proper. Stick with gold. 

Regards

Adrian Ash
For The Daily Reckoning

Adrian Ash is head of research at BullionVault.com the world's fastest-growing and best-value gold ownership service.

http://www.bullionvault.com/from/dailyreckon