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Hot milk: What rising prices tell us about inflation

Do you know how much a liter of milk costs? It’s a question designed to find out which celebrities and politicians are out of touch. In this period of inflationary inflation, central banks – and therefore markets – may also want to pay attention.

The price of milk, one of the most basic prices of goods, is increasing sharply. That’s important not only for shoppers, but for those of us after signs of how tough inflation will be.

Traditional milk has proven resistance to inflationary. Farmers and processors need to keep profits to a minimum if they want to sell their produce to supermarket giants, which are under pressure from retailers to cut prices.

These market dynamics – and the fact that we are now drinking more dairy-free alternatives – have meant that in the UK from 2008 until recently, the average price of a pint has been on par with a pint. drinks at 42p. In the past year, however, it has risen 40% to 59p. That still seems like a small change. But for a staple that the average person drinks 3 drinks a week, that’s pretty astounding for some.

It’s a similar story elsewhere. In Germany, price increase nearly a third in the past year, while the price of a gallon in the US has increased 15% since January.

Average price per pint (pence) line chart showing UK milk prices are on the rise

So what does the skyrocketing cost of a jug of milk tell us about the nature of inflation? And what percentage of the recent outbreak stems from supply shortages that emerged during the pandemic?

That we are seeing it happen in such a competitive market highlights how rising embedded prices are.

The costs of two of the largest inputs for dairy farmers – feed and fertilizer – are up 83% and 179% respectively over the past year, according to the UK Horticultural and Agricultural Development Board. “With farm input costs rising dramatically, dairy processors have had to pay more to ensure farmers don’t reduce output,” said Patty Clayton, the industry body’s lead dairy analyst. too much milk.

The war in Ukraine has exacerbated supply-side inflation. The media attention on the Russian invasion also meant that the increase in costs was not only painful, but also visible – a key factor that helped processors turn them over to manufacturers. Retailers.

Joanna Konings, senior economist at Dutch bank ING, said the fact that this has happened, after years of difficult negotiations with supermarkets, “shows us the extent of the current increase in input prices. How strong is it now?”

However, some input prices are currently falling. Among them is the cost of oil, a key factor in the entire supply chain. “Milk is collected from farms all over on tankers for them to use for fuel, then processing milk will take energy as it involves heating. Then there’s the cost of mass shipping milk, cheese and butter by road,” said Maggie Urry, who was once the dairy industry head for the Financial Times.

Droughts across the northern hemisphere may have shortened the “spring flush” period of peak milk production, affecting yields. However, with widespread commodity costs falling in recent months, milk price pressure may have peaked.

However, I suspect it will be some time before spillovers work their way through the supply chain.

When doing their weekly store, people notice inflation in two ways. The first is if the price of a staple they buy often goes up. You may or may not know what milk costs, but I highly doubt you can tell if the bottle of Tabasco sauce you buy twice a year now is more expensive during the winter.

The second is if the price of a basket of goods increases. Andrew Porteous, retail and consumer analyst at HSBC, said: “Everybody has a few items for which they know the price, but what most of us notice is what we pay when we pay. checkout: ‘Oh my, I’ve spent 55 quid this week instead of 50.’”

Supermarkets – not to be outdone by discounters that have robbed them of market share over the past decade – “want to make sure that their cart prices are competitive,” Porteous adds. They do that by tending to only increase the price of the products purchased.

Milk is so popular that even Mark Carney, the former governor of the Bank of England, who is as close to rock star status as central bankers, knows what a half-gallon costs. Combine that with an increase in the cost of the average store and what we have is a very clear increase in inflation.

That visibility matters a lot. It has the potential to not only affect shoppers and businesses’ expectations of where prices will be this time next year, but also drive demand for higher wages and price increases for products. others become more reliable. How can you complain of paying more to a farmer when you feel yourself being squeezed?

An increase in the price of a pint seems to me like a sign of inflation. I am cautious of market bets that monetary policymakers will soon turn away from raising borrowing costs. Instead, Carney’s successor, Andrew Bailey, and his central bank counterparts elsewhere will have to sit idly by while price pressures, from supply chains to supermarket shelves, play out. .

claire.jones@ft.com

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