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Merryn's Blog

Shrinking Creme Eggs? Blame the Bank of England

The Bank of England's decision to keep interest rates ultra-low has led to a weak pound amid soaring commodity prices. Some manufacturers have avoided putting prices up and instead, have elected to shrink the size of your everyday products. Merryn Somerset Webb explains.

There is a fabulous set of graphics in today's Times showing how the price of everything from gas bills to flour has gone up since 2006 (76% and 89% respectively by the way). It doesn't make for pleasant viewing, particularly if you live on a tight budget.

But looking at the prices of various products alone doesn't always tell you all you need to know about inflation, and food inflation in particular. A story in The Sunday Times returns to another element of the story: inflation doesn't always mean the price of something goes up; it could also show itself in that something getting smaller.

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Apparently, Jane Cork used to find it tricky to get a whole Creme Egg in her mouth as they were just a tiny bit too big. These days she says she has no such problem: "there is room to spare." She swears (and I think we have to believe her) that her mouth hasn't grown. Instead, "the egg must be getting smaller."

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It turns out that food (and other) manufacturers are "systematically shrinking the size of their products" in order to be able to hold prices sort of steady as input prices rise. Size cutting is, says one big manufacturer, "part of the kitbag." Everyone does it when they don't want to shock the consumer by putting prices up too fast. So you get 900ml of orange juice; 56 baby wipes instead of 63; andfour fifths of the soap per bar that you used to.

This is partly about global inflation as all MoneyWeek readers will know all too well, the prices of most commodities have soared since the turn of the century. That might come to a temporary halt soon, but then again, it might not: Sam Fleming notes, also in The Times, that China is soon to be a net corn importer, something that is hardly going to help matters.

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However, a lot of the rise in UK prices is also about the pound. Alistair Heath picks up the theme in City AM today. The pound was strong between 1997 and 2007, something that, alongside falling prices of consumer goods from China, meant that the prices of imported goods were slashed and slashed again. Take out food, drink, energy and tobacco and the prices of consumer goods in the UK fell by 18% in the ten years from January 1997.

Now things are going the other way, as a note from Michael Saunders of Citigroup makes clear. Thanks in the large part to the BoE's decision to keep interest rates at ultra-low levels, the pound started to fall in early 2007 and has been falling pretty much ever since. It is now down 25% in trade-weighted terms and 30% in euro terms. That means that the price of imported goods is once again soaring, something that explains why we appear to have higher inflation levels than Europe and the US.

The problem with this is that the Bank is mandated to control inflation to keep it around 2%. Raising interest rates could probably achieve that by both pushing sterling up (and import prices down) and by cutting overall demand.

So why isn't it doing it? Heath thinks it is because it wants to "boost exports". That's part of it of course. But it also wants to stop mortgage holders ending up on the street and to make a start on eroding the nation's public and private debt.

Heath thinks quite rightly that if the Bank's strategy has changed, "we should at least be told". Sadly, that isn't how financial repression works.

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