Tuesday, 17 July 2018

On farm bridges and inflation

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  • Anthony Peters Orig - Aug 2011

Anthony Peters looks at agri-finance and the UK’s vague guesses of real inflation

I return to the office in London today for the first time this year although I have not been inactive so far. As a petrol-head, this is a big week with the beginning of the annual Detroit Motor Show which seems to be caught up in the clutches of the new Corvette Stingray which, from first sighting, looks more like a cousin of Pixar’s Lightening McQueen, the hero of the animated movie “Cars”, than like a contender to take on the dominant competition from Germany, Italy and the UK.

However, before taking on the auto sector – I shall do that tomorrow for reasons which will then become apparent – I have a few rural observations I would like to share.

The papers here were full on the weekend with news that the Honda plant in Swindon is about to lay off a quarter of its staff due to slack demand from continental Europe. Barely had the howling and the wailing and the gnashing of teeth reached fever-pitch when Jaguar Land Rover turned up on the other side of the argument in announcing that it was hiring furiously in order to meet demand. Anyhow, as we talk a thousand jobs here and a thousand jobs there, I am thinking of tens of thousands of farmers and agricultural workers who are facing a very grim 2013.

The heavy rains which have beset the country for months and months have left much of the land unworkable. Where winter wheat should be thriving, there are muddy messes and the ground cannot be drilled. Slug damage to the crops which are down is of levels most farmers have never seen and it appears as though much of the waterlogged ground, should we not have four to six weeks of pretty much totally dry weather, will not be available for early spring planting. We all know that a farmer who doesn’t moan is as rare as a horned rabbit but I have seen the situation with my own eyes and, please trust me, it is not pretty.

While banks have been in the headlines for not lending to small businesses which has in turn led to all manner of initiatives emanating from Westminster which are supposed to encourage the provision of credit, I wonder where both the government and the banks will stand when it comes to farmers being in need of bridge finance to help them through the current year. The ancient self-levelling mechanism which saw prices rise when supply was short and fall in years of plenty has been lost to globalisation which takes no account of local conditions. Early forecasts are for low yields and even lower quality of the produce and, as said, a recession is quite likely going to hit the countryside.

Country folk are not the sort who go cruising off on Monday morning in order to sign on for unemployment benefit and therefore most of them will in all probability largely not appear in the unemployment statistics. They will all find some work now and them in some for or the other but whether it is a living wage or not is hard to tell. However, primary sector output does still appear in GDP statistics and a poor year will be a drag on figures even if industrial output stabilises. Economists should be prepared to undertake the necessary adjustments to their forecasts, even if they never have had mud and cow dung on their boots.

RPI respite

Meanwhile, last week, it was decided by a review commission not to recalibrate that very British of measures, the Retail Price Index. Linkers rallied out of sight on the news but I was asked by a reader whether I might revisit the subject of inflation as he couldn’t agree with a colleague whether RPI or CPI actually had any relevance at all. Well, as it is better to be partially right than absolutely wrong, the RPI and the CPI numbers are as close as we are ever going to get.

The greatest impact on inflation are the individual’s age and income. The price of baby wipes or tablet computers is not exactly of paramount importance to pensioners whose income is RPI linked but as many of them spend well over 10% of their household income on fuel for cooking and heating, the persistent rise in energy costs knocks them over. Although I noted above than the pending problems in UK agriculture need not necessarily drive food price inflation - another area where the elderly feel the impact more than others - there is no sense that the cost of feeding oneself is about to fall.

So, if RPI and CPI are only a general pointer as to where inflation is and where it might be going, then one inaccurate reading is as good as another one and therefore the decision not to revise is, in my view, a good one. Fiddling the outcome by altering the definition and the sample is an art as old as statistics itself - statistically six out of seven dwarfs aren’t happy but only one is dopey - and replacing one vague guess with another doesn’t make it any better.  

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