Economic update: what soaring food prices mean for the cost-of-living crisis

As consumers rein in discretionary spending, soaring food prices will take the cost-of-living crisis to another level, says Richard Ramsey, Chief Economist NI at Ulster Bank.

In recent years, the pandemic and lockdown restrictions turned consumer spending habits on their head. When it wasn’t possible to spend money on certain things, such as holidays and hospitality, we doubled down on our online spending on garden furniture, home entertainment, fitness products, and all manner of other things. Indeed, we saw a dramatic change in spending habits in a matter of weeks that under normal circumstances would have happened over many years.

Covid-inspired consumer spending boom now well and truly over

If, back at the start of 2020, you knew what was coming, you would have been investing in areas like telemedicine, digital transformation, streaming services, online fitness, and online shopping. In your portfolio, you would have had the likes of Zoom, Peloton, Teladoc and Netflix.

In some respects, things are now going full circle, and the impact on many large businesses is significant. Some of these brands have now seen their share price fall by 80% or 90% as a result of the ending of restrictions and the return to more normality. Zoom fatigue led people to migrate back to more face-to-face meetings. By late April, even Netflix shares were down by two thirds from their late 2021 peak. Though this one is perhaps even more to do with current pressures on consumer spending than it is to do with pandemic-related changes.

As lockdowns eased, we saw consumers open up their wallets to spend money that they hadn’t been able to spend during the pandemic. As a result, until recently, consumer spending had been very strong. Indeed, leading economists such as Duncan Weldon (writing on Substack, 11 April 2022) have been saying that 90% of the expected growth in the UK economy this year had been predicated on consumer spending as people depleted these lockdown savings.

Biggest fall in living standards since 1956

But the red warning lights are now on as energy prices and other cost increases are fuelling a cost-of-living crisis. Indeed, the Office for Budget Responsibility (OBR) has warned us that 2022 will see the biggest fall in household living standards since data began in 1956 (Economic and fiscal outlook – March 2022). As household fuel bills have risen, Netflix subscriptions have fallen. Meaning the heat is not just being turned down in households, there is also a chill in many firms’ earnings forecasts.

There are also shivers running down the spines of business people in other consumer-sensitive sectors. In the hospitality sector, for instance, they would have hoped for a full-circle return to pre-pandemic demand. Instead, they are now faced with the twin pressures of their own business costs rising rapidly and their customers’ ability to spend being hit as hard as it has been in many decades.

While consumers can cancel their Netflix subscriptions and turn down the heating to help cope with price rises, there is little they can do about rising food prices, such is the scale of the crisis that is unfolding

They will look on in envy at some sectors, such as ICT and pharmaceuticals, which boomed through the pandemic and have shown little sign of that abating – albeit that they are not without their challenges, such as finding the skills to support their ongoing growth. At a local level, had you been picking stocks and companies to invest in at the start of the pandemic with the benefit of hindsight, you might have opted for the likes of Kainos shares, or a stake in firms such as Learning Pool, Totalmobile, Almac or Randox.

Cost-of-living crisis also a cost-of-doing-business crisis

From a global perspective, though, many have been looking closely at the Amazon share price. It used to be said that when the US economy sneezes, the rest of the world catches a cold. In the case of Amazon, it could be said that when consumers sneeze, Amazon catches the cold. In that respect, the Amazon share price is a bit of a bellwether regarding consumer spending and worth watching. In Q1 2022, Amazon reported its first loss since 2015. A return to pre-pandemic norms and soaring costs were the main drivers. This highlights that it’s not just a cost-of-living crisis at present but also a cost-of-doing-business crisis.

The conflict in Ukraine and Russia has made a bad situation worse. The cost of living and the cost of doing business have already increased strongly and this is set to continue in the year ahead. At the time of writing, consumer confidence has already taken a hit. In May GfK’s Consumer Confidence Index reported that UK consumer sentiment had plunged to its lowest reading in almost 50 years. In Northern Ireland, the Asda Income Tracker (Cebr, April 2022) saw an annual contraction in discretionary consumer income of 13.3% in Q1 2022. This was the largest contraction of any region, as was also the case in Q4 2021.

Meanwhile, retailers’ optimism did a 180-degree turn between March and April, according to the Ulster Bank NI PMI survey. In February, retailers had been anticipating strong sales in the year ahead but as of one month on, they now expect sales to fall.

Inflation still expected to peak

Looking ahead, inflation is likely to hit around 10% in early autumn, meaning that the cost-of-living crisis will intensify until then, and, while inflation will peak at that stage, price rises will still remain strong. This means that the cost-of-living crisis will continue well into 2023. While consumers can cancel their Netflix subscriptions and turn down the heating to help cope with price rises, there is little they can do about rising food prices, such is the scale of the crisis that is unfolding.

Global food prices were already at record highs before the conflict in Ukraine. The disruption to food supply chains will have severe implications – not just rapid price rises, but also potential global hunger and social unrest. Disruption to the supply of cars and garden furniture is one thing; disruption to the supply of food is an entirely different matter. Appeasing this rising discontent will be the primary challenge of governments at home and abroad for the foreseeable future.

This article appeared in the Belfast Telegraph’s Top 100 magazine 2022.

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