Food price squeeze on consumers reversing
Simon Ward
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Food prices have delivered a significant boost to UK headline inflation in 2011 but are on course to be a restraining influence in 2012, implying welcome support for consumer purchasing power.
The daily CRB spot foodstuffs index has fallen by 15% from a peak in April, reaching its lowest level since December.
The CRB index is a reasonable guide to the more comprehensive monthly Food and Agriculture Organization (FAO) food commodity price index. The annual rate of change of the FAO index, expressed in sterling terms, leads UK CPI food inflation by about six months.
Based on this relationship, a post in September 2010 suggested that CPI food inflation would reach 7%, contributing to headline inflation overshooting Bank of England and consensus forecasts. The peak annual increase, in the event, was 6.5% in June 2011, with food inflation slowing to 4.6% by October.
Assuming no change from the current level, the FAO index will register an annual fall of about 10% by early 2012. This would be consistent with CPI food inflation subsiding to about 1% by mid 2012. Such a decline would cut 0.4 percentage points from the headline inflation rate (i.e. 4.6% minus 1% times food’s 10.3% weight in the CPI basket).
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