Lloyds TSB Column: Commodities stoke inflation

EXPRESSING concerns around the uncertainty of the future path of inflation, both the Bank of England’s November Inflation report and the ECB’s November bulletin highlighted rising commodity prices as a potential source of higher domestic prices in the coming months. Commodity prices have been moving higher as global economic conditions continue to improve and as commodities, such as food and metals, prove to be in short supply. Moreover, rising input costs are becoming more of a concern for the corporate sector which, given relatively weak demand conditions domestically, may not be passed on to distributors or final demanding consumers. Whether these prices will be sustained depends not only on the pace of growth in both developed and developing economies, but also on domestic exchange rate movements.

In particular, rising food prices remain a key concern, as these costs are more likely to be passed directly on to the consumer, eating into the more discretionary areas of spending. Food prices rose further this week as the US Agricultural Department cut estimates of US corn yields for a third consecutive month. Joining other large food companies such as McDonald’s and Kraft, Carlsberg announced that it would have to increase prices across all markets due to the elevated costs of wheat and barley.

However, food is not the only area where costs are rising, with manufacturers also experiencing a rise in other commodities such as energy and metals. In the case of more discretionary goods, higher production costs may not be as easily passed on, meaning a potential squeeze in profit margins in the quarters ahead. In the UK, last week’s release of PPI data showed that factory gate inflation was not keeping pace with input price inflation, increasing concern that margins for manufacturers might come under renewed pressure, especially as domestic demand conditions remain weak. Furthermore, there has been a pickup in import price inflation, in part because foreign manufacturers seek to pass on increased raw material costs.

Yet Europe is not alone in having to deal with rising commodity prices. China has also been feeling the cost of higher commodities. Consumer prices in the country accelerated to a two-year high in October, to 4.4% year-on-year compared with 3.6% in the previous month. The jump in inflation was higher than forecast (LBG:4.1%, consensus: 4%) and represents the fourth consecutive month that inflation has exceeded the government’s target of 3%. As expected, food prices were a key contributor, surging 10.1% year-on-year. Furthermore, producer prices are once again accelerating, up 5% year-on-year in October the fastest rate in four months, with mining extraction and raw materials up 11.8% and 8.5% respectively.

If any part of your business is exposed to the inflation rate, then please contact Lloyds TSB Corporate Markets to discuss how we may be able to help you to mitigate this risk for your business.

For more information on how we can help your business, please contact:

John Wood
Regional Director
Lloyds TSB Corporate Markets
Telephone: 0113 292 0246
john.wood@lloydsbanking.com

Hann-Ju Ho
Head of Sector Economics
Lloyds TSB Corporate Markets
Telephone: 020 7158 1745
hann-ju.ho@lloydsbanking.com  

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