Saturday, March 01, 2008

The real economy

What makes one feel that the economic situation is more dire than some pundits would have you believe is news like this in today's Telegraph which has: "Average grocery shop rises £9 in two years".

The down-page story is by Harry Wallop, the consumer correspondent, who tells us that the price of a basket of staple food items has risen by 17 percent over the past two years. This is an official government estimate that has figures for 20 everyday ingredients, including a packet of mince, a bag of potatoes, a pint of milk and a box of eggs, shows they have climbed from a combined cost of £50.03 at the start of 2006 to £58.74 now.

The weekly increase of £8.71 equates to an extra £453 over the course of a year - and the impact is likely to be more severe for families with children.

That, of course, is the real economy, which has food inflation running at 11.5 percent over the past year instead of the official broader index which would have us believe that inflation is still running below three percent.

As always, the proximate cause is well recognised, Darren Shirley, a food analyst at City firm Shore Capital, telling us: "It is staple lines that are being hit hardest. It's all because of rising global wheat prices, which have been caused by poor harvests and rising demand from China and India. So animal feed has shot up, causing meat prices to rise, as well as any animal by-product such as eggs and dairy."

But, by the time you add the swingeing increases from the utility companies, with energy, water and council taxes all increasing – to say nothing of thing like motor insurance, repair bills and the rest, the headline inflation rate bears no relation to the real thing.

What is doubly worrying is that City experts are beginning to realise that what should be a "near-term spike" in energy and food prices, which should only - in theory - cause just a short-term spike in inflation, might actually lead to longer-term pricing pressures, driving inflation up even further.

To that extent, our "weather watch" is showing the way. It is not only a matter of a short-term period of bad weather, but the attendant crop and livestock losses which are important. These can only add to the pressures on an already tight market.

It must be remembered that China was already having difficulties before the current round of bad weather, with its attendant economic losses, making an already bad situation immeasurably worse.

As a further indication of the global effect of this coming crisis, today’s Washington Post picks up on the effects soaring commodity prices are having on aid programmes – in this case US emergency aid.

This paper is telling us that the US government's humanitarian relief agency will significantly scale back emergency food aid to some of the world's poorest countries this year because of soaring global food prices, and the U.S. Agency for International Development is already drafting plans to reduce the number of recipient nations, the amount of food provided to them, or both.

Yet, this is at a time when need has never been greater, with reports coming in of an emergency airlift being mounted to deal with the emergency. This is a country, like Afghanistan, which has been suffering from its harshest winter in a quarter-century and where there is very real hardship.

Despite this, the reality is spelled out by Frank Orzechowski, an adviser for Catholic Relief Services, who is saying that his organisation has calculated that US food aid would drop from 2.6 million tons last year to about 2.2 million this year. His biggest concern is that there are going to be more people being pushed into food insecurity in poor countries at a time when the global community will be less rather than more prepared to cope with the situation.

Whether locally or globally, therefore, we are on the edge of an evolving decline in standards of living which has widespread political implications and which requires urgent and decisive political action.

Instead, as we have remarked, many policies seem to be pulling in the wrong direction while our own politicians (of both sides) seem to be more concerned with navel gazing than addressing this complex but increasingly urgent issue.

This political neglect can only last so long – you simply cannot conceal or ignore a crisis of this magnitude. Sooner of later, the politicians are going to have to address it. The longer they leave it, the harder it is going to be to resolve it – and the greater the political fallout.


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