A year’s worth of inflation in a single month

A recent study suggests inflation could be a much bigger problem than many people think. Markets are certainly not pricing it in. John Stepek explains why prices have shot up, and why it matters.

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. But I’m not so sure.

Another study came out the other week that suggests it could end up being a much bigger problem that we might expect right now. Here’s what it says.

Your grocery bills have shot up – and it’s not just all the extra booze

Researchers Xavier Jaravel, an associate professor at LSE, and Martin O’Connell at the Institute for Fiscal Studies think tank have pulled together a piece of very timely research on inflation that I think all of us need to pay attention to. (You can read the original here, it’s not especially heavy going as these papers go.)

The team took a look at data collected by market research firm Kantar, 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.

What are “fast-moving consumer goods” (also known as FMCG, an acronym you will never see me knowingly use, but which might be helpful if you read it elsewhere)? Basically, it’s all stuff you’d buy in the supermarket every week – food, booze, non-alcoholic drinks, toiletries, cleaning products, and pet food.

In other words, your grocery bills have gone up during lockdown – and not just because of all the extra alcohol you’re drinking.

By how much? The researchers reckon that the month-to-month inflation rate for groceries during the first month of lockdown (starting on 23 March – right at the stockmarket bottom, intriguingly enough) was 2.4%.

For context, that’s 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” (as of 17 May at least, which is when the study ends).

The researchers also found that more than half of the spike was down to a fall in the number of promotional deals (so 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 – and this I think is really interesting – it’s across the board. In 2018 and 2019, about half of households saw their grocery bills fall during the first five months of the year. But this year, regardless of what you were buying, you were paying more.

Put very simply – during lockdown, shopping basket prices have shot up in a way that we haven’t seen for literally years. That’s worth paying attention to.

OK, but why does this matter?

I know, I know. Right now, some of you are thinking something like this: “Wow. Supply chains get disrupted. Demand goes up because people don’t want to run out of stuff and because they don’t have anything else to spend their money on. Big deal. Of course, inflation went up.”

And you’re right. Of course inflation went up. And it’s not just because of problems filling shelves, or a rush to hoard. It’s about obstacles to effective competition too. For example, right now our household is definitely spending more on groceries than normal because we’re paying a premium for convenience.

It’s still hit and miss whether you can get an online delivery, and because we’re lucky enough to still be a fully working household, the main consideration is “how long is the queue today?” As a result, that means more “we’re out of milk!” ad-hoc 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? Firstly, if nothing else, it shows that inflation still happens, given the right circumstances. It hasn’t simply vanished. We didn’t magic it away with a combination of globalisation and clever central banking and Amazon and an ageing population and piles of debt. The old rules of supply and demand do still function, believe it or not.

Secondly, how confident are you that this is suddenly going to go away? We’ve been conditioned by the financial crisis to constantly fear deflation. But what if this doesn’t turn out to be as deflationary as we expect?

I’m not persuaded that supermarkets are 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’re longer lasting – it’s 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.

Thirdly – and this is why it really matters – markets are in no way prepared for the return of inflation. Even if it’s unlikely, they’re really not pricing it in as much of a risk, and that’s a problem. Because I think even the most ardent inflation sceptic would have to acknowledge that it’s not out of the question.

As Jaravel puts it in the conclusion to the study: “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.”

I’ve recently been writing about inflation – and how to position your portfolio for it – in MoneyWeek magazine and it’s clear to me that we’ll be doing it a lot more. Subscribe now to get your first six issues free.


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