Cost of Living to Keep Rising
as Oil and Food Hit Record Highs
HARRY WALLOP & EDMUND CONWAY
The Telegraph (UK) 6jun2008
Families should brace themselves for drop in the standard of living not seen since the oil shocks of the 1970s, economists warned after official figures showed the price of oil and food had hit a record high. The price of food, clothes, petrol and other goods are set to climb far faster than most salaries — leading to a severe downturn in families' standard of living.
The warning came after the Office of National Statistics released "absolutely horrendous" factory inflation figures, which showed that prices last month increased at the fastest rate since records began 22 years ago, and most probably since 1976.
Economists warned that the increase in prices would reduce families' disposable incomes at the fastest rate since the oil crises of the 1970s and early 1980s. Soaring prices could also force the Bank of England to raise interest rates before the end of the year, they added.
Michael Saunders, chief UK economist at investment bank Citigroup, said: "This will mean inflation going up and the standard of living going down. The UK is being hit by these big pressures, exacerbating the disparity between disposable incomes compared with costs in shops. People will suffer; they will spend less.
"This could hardly have come at a worse time. We've got these price pressures at the same time as the credit crunch and a housing collapse. Either one in isolation would be bad enough but to have them together is really tough."
"In terms of a globally-induced squeeze on the standard of living, this was worse than the experience of the early 1990s. We haven't had anything like this since the two oil shocks."
The price of food ingredients, oil, energy, chemicals and metals have all soared over the last month, with factories having to pay 27.9 per cent more for their goods than a year ago, according to the Office for National Statistics.
The surge in costs is so great that factories are now being forced to pass on a large chunk of the price rises, charging their customers — supermarkets and wholesalers — 8.9 per cent more than a year ago.
Even if retailers pass on just half of these cost increases, shoppers will be left coping with an inflation rate of above 4 per cent. With wage inflation running at just 3 per cent, this means most people will be left poorer at the end of the year than at the start.
Experts warn that retailers will have no choice but to pass on the record costs that factories are facing, especially as the cost of crude oil has increased by 83 per cent over the last 12 months.
Alan Clarke, economist at BNP Paribas, said: "There has been such a build-up in cost pressure and for so long, that either firms pass on higher costs or they go out of business."
Some factories are already in severe trouble from the surge in costs.
One of Britain's biggest food manufacturers — Northern Foods — has closed a pasta and ready meals factory in Grantham, Lincolnshire that supplied Marks & Spencer. Up to 700 people face losing their jobs after Northern said that it failed to persuade M&S to share the burden of higher costs.
Last week a cooked meat plant in Deeside, north Wales shut down with the loss of 70 jobs, because of escalating prices.
Jonathan Loynes, at Capital Economics, said: "The increases are now so large that at least some portion of them looks likely to work its way into the high street, even if retail sales slump."
The Producer Price Indices (PPI) — both what the factories are paying for their goods, and what they are passing on to their customers — are now at their highest level since records began in being collected in this way in 1986.
However, the Office of National Statistics added that they are almost certainly the highest level since November 1976.