Last Wednesday the UK’s Office for National Statistics announced that the consumer price index (CPI) dropped to 2.4 per cent year on year in September (2.2 per cent if owner-occupied housing is included), from 2.7 per cent the previous month and a peak of 3.1 per cent in December 2017. This was way below consensus estimates (2.8 per cent) and took the core rate of inflation down to 1.9 per cent annualised. The Trader was not entirely surprised as CPI has often peaked at 3 or 5 per cent over the past quarter of a century. We feel it is now on a downward trajectory towards 1 per cent.
Food prices were the culprit. Pundits left, right and centre had warned that these were likely to rise by 5 per cent because of this summer’s heat and drought. Wrong again, I’m afraid, and UK vineyards are in the process of harvesting their biggest ever crop of grapes. Well-established Denbies near Dorking says: "We’ve rented out 200,000 extra litres of temporary tank storage."
The largest downward contribution to CPI came from food and non-alcoholic beverages, where prices fell 0.1 per cent in the month to September but rose 0.8 per cent this time last year; meat and chocolate prices dropped the most. Other contributors to the latest lower reading were transport, clothing (as has been the case for years), recreation and culture.
Have we turned arty and vegan, ditching sweet treats and fizzy pop? Not exactly, but maybe the message of austerity is also sinking its teeth into eating habits. We look at four important agricultural commodity charts to see whether the new frugality might last.
Cocoa futures prices in New York peaked at just under $3,000 per metric tonne early this year; at just over $2,000 today, they trade at less than half the record high of 1977, which was well over $5,000. Support at $1,800 held for the past decade but, should this give way, we’d pencil in a slide to $1,300. Are we eating less of this? Chicken or egg?
For many, beef remains a luxury even though prices almost halved from 2014’s record high of 172¢ per pound. A series of descending peaks continues to dominate this chart, suggesting downside pressure and a re-test of 95¢ (2016’s interim low); an eventual break below here towards 80¢ is where a lengthy period of stability should ensue. Consider it a long-term equilibrium level.
US wheat prices have been fairly subdued for the past three years, holding around a secular median price just under 500¢ per bushel. Despite this summer’s hot dry weather across Europe, yields are not down by as much as feared, and producers in other countries are very keen to step into any gap. Therefore, we feel prices are unlikely to trade over 600¢ for another year or so, and are more likely to drift towards 375¢.
Finally, an increasingly important crop globally, and for UK farmers too: rapeseed. Like it or loathe it, it’s used as a substitute animal feed crop to soybeans. Over the past 40 years price swings of the benchmark ICE canola futures contract have been wild indeed, often quadrupling then halving in a matter of months. Currently at C$492 per tonne, it’s exactly at the mean regression for the whole period – meaning it’s as likely to go up a bit as down a bit.
