Farm floods to fuel UK inflation

UK faces inflation rise

The UK faces extra inflationary pressures, and further interest rate rises, later in the year, due to a combination of flood damage to crops and increasing fuel prices.

The severe flooding across June and July has seriously damaged the UK’s farming production, with extensive damage to crops such as potatoes, peas, sprouts, wheat, barley and various garden vegetables.

According to farmers, this has seriously damaged the ability for UK farms to deliver over the harvest period, as huge areas of land have suffered extensive crop damage due to the flooding.

Not only will this mean less likelihood of being able to provide for supermarket shelves, but it will seriously impact the ability for many farms to feed livestock over the winter period.

The warning comes as extreme weather has plagued Europe’s summer months, with western Europe hit by flooding and south and eastern Europe suffering from an unusual heat wave. The result is crop damage affecting a large proportion of Europe’s farmers.

Even in Scotland, which escaped the flooding that affected the rest of the UK, the weather has been unseasonally damp, and Scottish farmers are already battling to save potato crops against blight.

Reduced availability of common agricultural goods is expected to push up food prices significantly later this year, and some vegetable produce may even be missing from supermarket shelves.

The problem is that inflation is very susceptible to food price increases. Not only are food products a mainstay of the Consumer Price Index (CPI) measurement of inflation, higher grocery bills are also likely to have a knock-on effect on consumer spending in other areas, reducing spend in markets such as luxury goods.

This is likely to create a significant new upswell in inflationary pressures on the UK economy towards the Autumn.

An additional problem is yet another rise in energy costs. Even before the floods in Britain, the Bank of England indicated that energy price pressures had been a key reason for inflation to soar well above their target of BoE – and additionally, that falling energy prices were a key reason for the recent monthly falls.

However, the price of oil has already almost broken it’s previous record this month, stubbornly rising towards $80/barrel, with little sign of price reductions. While much of this pricing is based on speculation, lower inventories, limited refinery capacity, and continued worries about oil production around key global locations underpin oil’s constant high price.

Coupled with the problem of serious damage the to UK’s agricultural industry, it present a dangerous combination of strong inflationary pressures aimed at the heart of the CPI.

It couldn’t come at a worse time either.

With the stock markets currently trying to rally against serious concerns of world debt, increases to long-term interest-rates via bond prices, and serious pressures on the world’s property market, the Bank of England may yet be faced with their most important rate rise decisions coming in later in the second half of the year.

Facing a need to balance the impact of interest rate rises against the Christmas economy, while hit by a double whammy of inflationary pressures, the danger is that the UK economy could enter 2008 with a seriously undermined economic outlook.

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