Inflation battle isn’t over yet: Bank of England must resist the urge to hike interest
Don’t hold your breath quite yet. It’s true that oil prices are falling and share prices around the world are up amid relief that the US and Iran are finally hoping to sign their interim peace deal on Friday.
But this doesn’t mean the full repercussions of the conflict have been resolved. Far from it.
Although oil and gas prices are already down to their lowest level since the first week of the war in March, it’s still going to take weeks, if not months, for shipping to resume through the Strait of Hormuz.
Such was the euphoria around hopes of an accord that Goldman Sachs has cut its oil price forecast to $80 a barrel by the end of the year, and to an average of $75 for next year.
There’s another reason too why oil prices are dropping faster than expected – and why they didn’t rise as high as some had feared.
While a big chunk of the world’s oil supplies flow through Hormuz – around 20 per cent – it’s actually less than it used to be because so many countries have dug deep into their reserves or sought new supplies to be less reliant.
Bottleneck: Oil and gas prices are already down to their lowest level since the first week of the war in March amid hopes the Straight of Hormuz (pictured) will fully reopen to shipping
That’s the good news. Now comes the not so good. The most serious impact of this conflict is going to be on food prices because of higher energy costs still flowing through as well as soaring fertiliser prices.
Nearly a third of the global supply of urea – the main commodity used for artificial nitrogen-based fertiliser – comes from Iran, Qatar, the UAE and Saudi Arabia.
So no surprise that urea futures have risen by around 70 per cent since the conflict began.
And these costs are only just being priced into the costs for farmers worldwide – many of whom are buying now for the autumn planting season – and will have a devastating impact on food prices, and other manufactured goods.
It’s why Kris Licht, boss of consumer goods giant Reckitt Benckiser, was spot on with his warning yesterday that it’s far too early to draw any conclusions from the peace deal.
In a Reuters interview, he said he expects a ‘delayed inflationary hit’ from the crisis, with a ‘profound’ tailwind from feedstocks and commodity prices rising over the next year. What’s more, we are at the beginning of seeing that come through, he added.
It’s also why the Food and Drink Federation, representing around 12,000 UK food and drink makers, has upped its food inflation forecast to 10pc by the end of the year.
There’s no mystery why food inflation is expected to soar again: it’s a straightforward reaction to higher energy and fertiliser costs – and another consequence of our insane Net Zero policy leaving us with some of the highest electricity costs in the world.
(Red diesel – used for farm machinery – is up 80 per cent since the conflict began.)
Even more damning is that farmers in the UK now import around two-thirds of fertiliser needs, another consequence of the hollowing out of Britain’s agricultural and chemical industries.
Although the UK is particularly vulnerable because we import such a high proportion of foodstuffs, higher food prices are a global phenomenon as about half of the world’s food production relies on artificial nitrogen-based fertiliser.
Indeed, keeping a lid on inflation is one of the reasons why Donald Trump has been forced to do this rather lop-sided deal with Iran.
President Trump wants his new Federal Reserve boss, Kevin Warsh, to hold interest rates when the Fed meets today, which is most likely.
With any sense, the Bank of England will do the same when it meets tomorrow. Hiking them in this volatile climate would do more harm than good. Raising them would not stop food prices rising but it would hurt growth even further.
You’re fired
Getting expelled from school – or indeed your country – and being fired has been the route to success for many an entrepreneur. Think Richard Branson, Steve Jobs and Walt Disney.
And so it is with Malik Karim, expelled with his family from Uganda aged 12, and fired by Credit Suisse.
Karim went on to set up Fenchurch Advisory Partners, specialist corporate advisers in financial services, making it to the number one slot in the UK and Europe.
And now he is going trans-Atlantic, getting together with the US advisory firm, Broadhaven Capital. It makes a nice change of direction.
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