MNI POLICY: UK Food Prices Add To BOE Concerns

By David Robinson

     LONDON (MNI) - An apparent jump in UK food price inflation during the

Covid-19 lockdown may prove short-lived, but it adds to Bank of England concerns

about a squeeze on low earners' buying power.

     Grocery price inflation spiked to 2.4% in the first month of the lockdown,

imposed on March 23, driven by a cut in supermarket promotions, according to

research from the Institute for Fiscal Studies on Friday. While this apparently

contradicted data from the Office for National Statistics, which reported a

small fall in food and non-alcoholic beverage prices in April, the ONS does not

take two-for-one deals and similar offers into account.

     The Bank, whose Monetary Analysis division often has access to studies from

the IFS and elsewhere before they are published, is likely to have looked hard

at the data. While questions remain over whether the rise in groceries prices is

one-off, the BOE is already concerned by the disproportionate impact of the

Covid crisis on lower earners, whose greater marginal propensity to consume

makes them key to the transmission of monetary policy. Higher prices on

essential items may further erode their already-impaired spending power.

     --ONE-OFF SHOCK

     "An important question going forward is whether this is indeed a one-off

event, and perhaps something that might be reversed as we move out of lockdown,

or rather is it an indication that we might see higher grocery inflation in the

future?" Martin O'Connell, Deputy Research Director at the IFS, told MNI.

     "Even if it is a one-off event, it comes at a time when many households are

subject to other shocks, reductions in their incomes for example, and it may

nonetheless be the case that this one-off event is eating into household

budgets," he said.

     But another piece of research, which will also have come to the BOE's

attention, has shown that the Covid effect on inflation has been only marginal.

A special inflation basket reflecting changed consumption patterns during

lockdown indicated consumer prices rose by 0.81% in April, almost exactly in

line with the ONS's official headline CPI number of 0.8%. The study, by Harvard

academic Alberto Cavallo, a founder of the big data Billion Prices Project that

uses online prices from around the world for economic analysis, found that in 10

countries the Covid inflation rate was higher than official CPI and in six it

was lower.

     Cavallo used ONS data showing a dip in food prices, but increased the

weight of essential items in his basket, producing a largely neutral overall

effect.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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