Food prices and the UK economy

There is a timely report from Ernst and Young ITEM club on the likely macroeconomic impact of rampant food price inflation on the UK. Brief details below together with a link to the report.

Inflation:
Food and non-alcoholic beverages account for only 11% of the CPI basket, the sharp acceleration in food price inflation to 6.6% over the last year is
adding to the recessionary forces threatening the economy.

Balance of Payments
The UK is more exposed to rising world food prices than its peers – it runs a trade deficit in food equal to 1% of GDP, whereas the US is in balance and France runs a surplus

Input costs and profit margins:
Food is a major input into many industries - Input costs climbed 23.3% over the year to April yet, with consumers’ disposable incomes falling, output prices rose just 7.5% as companies continued to squeeze margins

Real incomes of consumers:
Consumers, particularly the less well-off, will also face some tough choices. Will the price point soon be reached for organic and fair-trade products that puts such purchases beyond the reach of all but the comfortably well-off?

Monetary policy risks
The danger now is that rising world prices will lead to excessively tight monetary policy, as the Bank of England tries to counter the impact of higher food and energy prices

ITEM support a change of inflation target to ‘core CPI’ which excludes the effect of food and energy prices

The ITEM report can be downloaded as a pdf file by clicking this link