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Posts Tagged ‘costs of production’

Morrisons Brand: ‘Milk for Farmers’

Most of us will have milk in our fridges – it’s a basic product consumed by the majority of people on a daily basis and hence a common feature of most shopping trolleys. As we saw in the post Got milk?, the low price of milk has been causing problems for farmers. This has caused one Morrisons store to take a different approach.

In the increasingly globalised world, British dairy farmers are no longer competing against each other. The global market place means that they are now facing growing competition from abroad and in this global world, supply exceeds demand. Even in the EU, the member states in 2015 are exceeding the milk production levels from 2014. In many markets, we wouldn’t be so concerned about production (or supply) rising, as demand can keep pace. However, in the market for milk, it’s not a product that you consume (that much) more of as your income rises. So, as the world gets richer, demand for milk is not increasing at the same pace as supply – demand in China has collapsed. This means that prices are being forced down. Adding to this global market place, we saw the European Union remove its quotas on milk production, thus boosting supply and Russian bans on imports.

The farmers themselves are in a tricky situation. They are often the small players in the supply chain, with prices being forced down by customers, supermarkets and milk processors. AHDB Dairy, the trade body, says that the average price of milk has decreased to just 23.66p per litre. According to leading industry experts this is well below the costs of production, suggested to be closer to 30p per litre. If these figures are even close to being accurate, then clearly dairy farmers’ costs of production per litre are no longer covered by the price they receive. Every litre of milk produced represents a loss.

The price that supermarkets pay to farmers for milk does vary, with some such as Marks and Spencer and Tesco ensuring that they pay farmers a price above cost. However, Morrisons in Bradford has adopted a new strategy and brand. Their new milk brand ‘Morrisons Milk for Farmers’ has been launched at a 23p price rise for every four pint bottle. The catch: they will become the first UK retailer where the 23p price hike goes directly to farmers. This represents 10 pence per litre of milk going directly back to the farmers that produce it. This is a bold strategy, but data and surveys do suggest a willingness to pay more from customers, if it means that dairy farmers get a fairer deal. The protests we have seen across the country have certainly helped to generate interest and created awareness of the difficulties that many farmers are facing. Rob Harrison from the NFU said:

“We are pleased that Morrisons has acknowledged the desperate situation that many dairy farmers still find themselves in and recognise that retailers have a big role to play in, helping customers to support the UK dairy sector…

…Research from Mintel revealed over half of people who drink cows milk, would be prepared to pay more than £1 for a four-pint bottle of milk, as long as it is dairy farmers that benefit. This new initiative will enable them to do just that. The 10p a litre extra will go directly back into the dairy sector will make a difference on farm.”

The interesting thing will be to observe the impact on sales following this 23p price rise. We would normally expect customers to look for the cheaper substitutes, but evidence does suggest that British consumers are willing to pay the price premium if it means helping British farmers. A similar strategy adopted for British Cheddar Cheese proved fruitful and over the coming weeks, we will see if the average consumer is willing to pay directly the dairy farmers. The following articles consider this topic.

Morrisons milk for farmers brand goes nationwide at £1.12 for four pints The Grocer, Carina Perkins (12/10/15)
Morrisons to create new milk brand for farmers BBC News (11/10/15)
Milk price row: farming union leaders meet Morrisons bosses The Guardian, Graham Ruddick (11/10/15)
Morrisons to sell new ‘Milk for farmers’ brand to support British dairy producers Independent, Loulla-Mae Eleftheriou-Smith (11/8/15)
Government to give one-off milk payment for dairy farmers as Morrisons launches premium milk brand City A.M., Catherine Neilan (12/10/15)
New Morrisons milk brand pays farmers more The Yorkshire Post (12/10/15)

Questions

  1. Using demand and supply analysis, explain which factors have caused the price of milk to fall.
  2. When incomes rise, the demand for milk does not really change. What does this suggest about the income elasticity of demand for milk and the type of product that it is?
  3. If prices rise and sales also rise, does this suggest that British milk has an upward sloping demand curve?
  4. If we do see little effect on the demand for milk following Morrisons 23p price rise, what conclusion can we come to about the price elasticity of demand?
  5. Why do supermarkets and milk processors have the power to force down prices paid to dairy farmers?
  6. What type of market structure do you think dairy farmers compete in?
  7. If dairy farmers are unable to sell a litre of milk for a higher price than it costs to produce, is it a sensible strategy for them to remain in the market?
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Stamp ‘profiteering’

46p – that buys you a First Class stamp. However, the price will now rise to 60p and the price of a Second Class stamp will increase to 50p from 36p, as Ofcom lifts some price caps. These significant price rises have seen shortages of stamps emerging across the country. As people anticipate the price rise, individuals and businesses are buying up stamps while they remain relatively cheap.

The problem is that this has started to result in a stamp shortage, so much so that the Royal Mail has now begun rationing retailers’ supply of stamps, capping each retailers’ supply this month to 20% of its annual allocation. A Royal Mail spokesman said:

“We are more than happy for retailers to receive the normal commercial return they obtain on stamps and no more than that … That is why we have put in place a prudent allocation policy to safeguard Royal Mail’s revenues and ensure there are more than enough stamps for people to buy both now and in the future.”

With postage volumes falling, as individuals turn to other methods of communication, Royal Mail says that this price rise is essential to keep this universal service going. Revenues have been low and the Royal Mail has been loss-making for some time.

However, while the price rise may help the Royal Mail, many businesses may suffer in its place. One optician, who sends out approximately 5,000 reminders to patients each year intends to bulk-buy 10,000 stamps in the hopes of saving some £1,400 when prices of stamps rise. An IT worker bought 20 books of 12 first-class stamps and said ‘If I could afford it, I would buy a lot more’. Many are unhappy at the ‘shameless profiteering at the public’s expense’, but whatever your opinion about the price rise, it does make for an interesting case of demand and supply. The following articles consider this stamp shortage.

Man’s 10,000 stamp panic: stampede for stamps leaves a 1st class mess as Royal Mail introduces rationing ahead of 30% price rise Mail Online, Colin Fernandez and John Stevens (15/4/12)
Stamps rationed by Royal Mail in run up to price rise (including video) BBC News (13/4/12)
Stamp rationing could hit pensioners Telegraph, James Hall (14/3/12)
Stamp sales limited ahead of price hike Sky News (13/4/12)
How stamp collecting came unstuck Guardian, Hunter Davies (13/4/12)
Royal Mail limits supply of stamps ahead of price rise Telegraph, James Hall and Andrew Hough (12/4/12)
’Profiteering’ Royal Mail limits supply of stamps before price rise Guardian, David Batty (13/4/12)
Royal Mail’s stamp price rises come into force BBC News (30/4/12)
How businesses will be affected by Royal Mail’s changing prices BBC News, Catherine Burns (28/4/12)

Questions

  1. If people expect prices to rise, what will happen to the demand curve? Illustrate this idea on a demand and supply diagram?
  2. If suppliers anticipate a price rise, what would their best strategy be?
  3. On a demand and supply diagram, illustrate the shortage of stamps that has emerged. If left to the free market, what should happen to the price of stamps?
  4. Why could pensioners and those in rural areas be the most adversely affected by this shortage and price rise?
  5. Why could ‘children and new collectors’ be priced out of the market?
  6. Why will small businesses be affected by this price hike? How could their customers be affected?
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There’s no watering down the latest price rise

From April 2012, the average household water bill will rise by 5.7% to approximately £367. With households already feeling the squeeze this news is more than unwelcome. The increase in prices will not be standardized across England and Wales. Instead some households will suffer more than others, as their water providers increase prices significantly more than those in other areas.

There has been significant investment in the water industry over the past few years and if this is to continue, funding is required: hence the price hikes. More investment is taking place in some areas than in others and so this goes some way to explaining why some households will see their bills rise by a relatively larger amount. Ofwat, the water regulator, has said that if the investment that these price rises are paying for doesn’t materialize action will be taken. In the context of the current financial situation, consumer groups are understandably concerned about the impact this may have on the lowest income households. Tony Smith, the Chief Executive of the Consumer Council for Water has said:

‘We’ll be making sure that customers get some benefits from this and also that companies step up their help for customers with affordability problems’.

The following articles consider this issue.

How to cut your water bill The Telegraph, Kara Gammell (31/1/12)
Water bills rise by average of 5.7% Guardian, Jill Insley (31/1/12)
Water meter case study: ‘They have set the charges too high’ Guardian, Jill Insley (31/1/12)
Water bills to rise by 5.7 per cent Financial Times, Elaine Moore (31/1/12)
Welsh water imposes lowest increase The Press Association (31/1/12)

Questions

  1. Why are household incomes already being squeezed?
  2. Why would you suggest that the RPI and not the CPI has been used to make up the price rises?
  3. Why are there such wide variations in the amount that consumers are currently charged in different parts of the country? Do you think this is fair? You may find it useful to look at a previous blog on the site
  4. What is the role of the regulator, Ofwat?
  5. Can Ofwat’s decision to allow prices to rise by more than the RPI be justified?
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An energetic price war

In an earlier blog Energy profits margins up by over 700% we analysed the increasing pressure on many households as they saw their energy bills increase in price year on year. This helped the big six energy companies achieve a 700% rise in their profits.

However, it also sparked interest by the regulator Ofgem, which was looking to ensure that consumers found it easier to make price comparisons and create a more competitive market. One issue that Ofgem were looking into was how to make the energy sector more open to competition, given that the big six companies own the power stations and hence this acts as a barrier to the entry of new firms.

The latest announcements from some of the big energy companies will therefore come as a pleasant turn of events for Ofgem. On Wednesday January 11th 2012, EDF announced that it would be cutting its energy prices by 5% from 7th February in response to a fall in wholesale costs. Only a day later, Npower announced its plans to cut its tariffs by 5% from 1st February. British Gas cut its prices by 5% with immediate effect and SSE will reduce its gas prices by 4.5% from March 26th.

Is this a sign that the market is becoming more competitive thanks to Ofgem or is there another explanation? For the past 2 winters, temperatures have been consistently below freezing and hence demand for gas/electricity was at an all time high, speaking concerns of gas shortages. However, with the mild winter we are currently experiencing (I hope I haven’t jinxed it!) demand for heating etc has been significantly lower, which has reduced wholesale costs and the big six companies have begun to pass these savings on to their customers. Yet, despite this seemingly good news, are they being as ‘kind’ as we think? Most of the companies are cutting their prices by about 5%, yet wholesale prices fell by significantly more than that. Furthermore, over the past few years, customers have seen their tariffs increase significantly – by a lot more than 5%. To some extent, this confirms the criticism levelled at the energy sector – when costs rise, they are quick to pass on the full costs to their customers. But, when costs fall, they are slow to pass on only a fraction of their cost savings. The following articles consider this issue.

Npower will cut gas prices by 5% BBC News (13/1/12)
EDF cuts gas price by 5% Reuters, Karolin Schaps and Henning Gloystein (11/1/12)
British Gas readies push to promote price cut MarketingWeek, Lara O’Reilly (13/1/12)
British Gas cuts prices by 5% Independent (13/1/12)
Energy suppliers do battle in the war of modest price cuts The Telegraph, Emily Godsen (13/1/12)
British Gas and SSE follow EDF Energy price cut Financial Times, Guy Chazan and Sylvia Pfeifer (11/1/12)
British Gas cuts electricity prices, but keeps gas on hold Guardian, Hillary Osborne (12/1/12)
British gas and SSE announce price cuts (including video) BBC News (12/1/12)
More power firms cut energy tariffs The Press Association (12/1/12)

Questions

  1. In which market structure would you place the energy sector? Explain your answer.
  2. What is the role of Ofgem? What powers does it (and the other regulators have)?
  3. Using a demand and supply diagram to help you, explain why wholesale costs have fallen.
  4. Why have the energy companies only passed on about 5% of cost savings to their customers, despite falls in wholesale costs of significantly more than that?
  5. Do you think price wars are likely to break out in this sector? Are they in the interests of consumers?
  6. Why did energy prices increase so quickly last year and the year before? Use a diagram to help you.
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A Minimum that is still too low?

The National Minimum Wage is a rate applied to most workers in the UK and is their minimum hourly entitlement. For adults over the age of 21, it has recently been increased to £6.08 – 15p rise. Rises have also been seen for 18-20 year olds, 16 and 17 year olds and apprentices. Undoubtedly this is good news for workers receiving the minimum wage, but what does it mean for firms and national unemployment data?

Market wages are determined by the interaction of the demand and supply of labour and when they are in equilibrium, the only unemployment in the economy will be equilibrium unemployment, namely frictional or structural. However, when the wage rate is forced above the equilibrium wage rate, disequilibrium unemployment may develop. At a wage above the equilibrium the supply of labour will exceed the demand for labour and the excess is unemployment. Furthermore, firms are already facing difficult times with the economic climate: sales remain relatively low, but costs are still high. By increasing the national minimum wage, firms will face higher labour costs and this may discourage them from taking on new workers, but may also force them into laying off existing workers.

It is hoped that the size of the increases will help low paid workers, as costs of living continue to rise, but won’t cause firms to reduce their labour force. This is one reason, in particular, why the increase in the minimum wage for young workers is smaller than that for adults. Youth unemployment is relatively high and so it is essential that firms keep these workers on, despite their increased costs.

Although the TUC has welcomed the increases in the National Minimum Wage, saying they will benefit some 900,000 workers, the General Secretary of Unison has said that it isn’t high enough.

“The rise to £6.08 is a welcome cushion, but with the price of everyday essentials such as food, gas and electricity going up massively, it won’t lift enough working people out of the poverty trap.”

The following articles consider this issue.

Minimum wage rises by 15p to £6.08 an hour Telegraph (3/10/11)
Minimum wage up by 15p to £6.08 BBC News (1/10/11)
150,000 social care workers paid below legal minimum wage, research reveals Guardian, Shiv Malik (3/10/11)
Unions want £8 an hour minimum wage Press Association (1/10/11)
Hunderds of thousands of women to benefit as minimum wage hits the £6-an-hour mark for the first time Mail Online, Emma Reynolds (29/9/11)
Unions demand minimum wage of £8 an hour Telegraph (30/9/11)
Changes will benefit workers Sky News (2/10/11)

Questions

  1. Is the minimum wage an example of a price ceiling or a price floor?
  2. If the National Minimum Wage was imposed below the market equilibrium, what would be the effect?
  3. If imposed above the market wage rate, the National Minimum Wage may create unemployment. On which factors does the extent of unemployment depend?
  4. Why is it expected that female workers are likely to be the main ones to benefit? What does this say about gender inequality?
  5. Why does the General Secretary of Unison not believe the higher National Minimum Wage will help people out of the poverty trap?
  6. How will the National Minimum Wage affect a firm’s costs of production. Illustrate the likely impact on a diagram.
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Agricultural troubles in Europe

The outbreak of E. Coli has already cost lives, but it is also costing livelihoods of farmers who rely on producing and selling agricultural produce. Immediately following the outbreak in Germany, the blame was put on Spanish producers of cucumbers, which lead to the destruction of tens of thousands of kilos of fresh produce, costing Spain an estimated £177m per week in sales. Although Spain is not the source of the outbreak, the problem has not disappeared and will now affect the whole of Europe: at least until the source is identified. Countries such as Spain, France and Germany are big exporters to Russia and these countries are likely to take a big hit with the Russian health service banning imports of EU vegetables. The impact of this action (together with other countries implementing similar strategies) has not only affected agricultural producers, but is also having wider impacts on other sectors, including transportation. If no-one wants to buy the products, there’s very little use for the companies and indeed drivers to deliver them.

The Spanish economy will be looking for compensation from Germany for the losses they incurred, when sales of fruit and vegetables practically ceased following Germany’s initial accusation. As the Spanish Prime Minister Zapatero said:

“We acted as we had to, and we are going to get reparations and the return of Spanish products to their rightful place. … I believe that any other interpretation or any effort to politicise the huge mistake made by the German authorities is totally unfair.”

The effects of this outbreak have spread to UK supermarkets and producers. The former have reported a slight drop in sales of fruit and vegetables, but have not taken this opportunity to drop the prices paid to British growers, which is particularly important for cucumber producers, given the high production costs. Sarah Pettitt of the National Farmers Union said she was ‘extremely encouraged to hear that the major supermarkets … are not using this unfortunate situation as an excuse to drop prices to British growers.’ In fact some believe that the outbreak could be good for UK producers, as consumers increasingly turn to home-produced products. While the source of the outbreak remains unknown, so does the future of agricultural producers throughout Europe, as well as all those that have any dependence on this huge industry.

E. Coli outbreak: UK cases rise to 11 BBC News (4/6/11)
E coli source hunted as growers fear sales slump Guardian, Robin McKie (4/6/11)
Farmers reel as outbreak hits demand Financial Times, Matt Steinglass and Victor Mallet (3/6/11)
Spain seeks compensation for E. Coli blame BBC News (3/6/11)
E.Coli: Economic impact on the agriculture industry BBC News, Richard Anderson (3/6/11)
Spain says Germany mulls EU aid over cucumber slur Associated Press (3/6/11)
Rose Prince: Cucumbers, diet and Prof Moth Telegraph, Rose Prince (4/6/11)

Questions

  1. Why have cucumber producers been experiencing falling profit margins in recent years?
  2. Could the outbreak of E Coli bring any benefits to the UK economy?
  3. What are the costs and benefits to Russian consumers and producers from the protectionists measures that have been imposed on EU imports of fruit and vegetables?
  4. Which sectors within the European market are likely to experience the biggest problems?
  5. Explain why the Chairman of the National Farmers Union was ‘encouraged to hear that the major supermarkets … are not using this unfortunate situation as an excuse to drop prices to British growers’. Why would supermarkets have an incentive to do this?
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A retail slowdown

Growth in the UK for the final quarter of 2010 was originally at -0.5%. However, the latest data has revised that figure to -0.6% and not all of this was down to the snow. Analysts say that the snow effect is still believed to explain the 0.5% contraction, but the economy therefore declined by 0.1% because of other reasons and retailers have seen the effects. Primark has reported a ‘noticeable’ slowdown in demand since the beginning of 2011. With increasing VAT and rising cotton prices, clothing retailers are feeling the squeeze. The same is true of UK consumers. With an increase in VAT and high inflation, consumers’ purchasing power has simply fallen and so they are spending less. Despite this slowdown, Primark’s revenues are still significantly ahead of the same time last year.

The parent company, Associated British Foods (ABF) commented on the disappointing trading of 2011 so far, saying:

“Since the New Year, the performance in all our operations in Continental Europe has been very encouraging but there has been a noticeable slowing down of UK consumer demand.”

However, despite disappointing figures for Primark, UK retail sales did pick up in January, although analysts are warning against taking this information as a sign of recovery. As Hetal Mehta from Daiwa said:

“While we expected there to be some clawback from December’s dismal, snow-hit retail sales, today’s jump is a welcome surprise. But is still far too early to conclude that consumers are weathering the storm … and with the past week’s unemployment figures highlighting the fragility of the labour market, the housing market continuing to weaken and real earnings being hit hard by high inflation, it seems inconceivable that consumer spending will act as the driving force of the economy over the near term.”

There are many opinions about what to expect from the economy in 2011, but for any concrete information, we really have to wait for at least another month. Perhaps by Easter, we’ll have a better idea about the state of the UK. For now, there are a few articles considering the retail sector.

Primark owner warns of slowing sales in UK Guardian, Graeme Wearden (28/2/11)
Primark warns of ‘noticeable’ slowdown in UK demand BBC News (28/2/11)
Growth in UK retail sales slows sharply Wall Street Journal, Alex Brittain and Art Patnaude (24/2/11)
UK retail sales rebound: reaction Telegraph (28/2/11)
UK GDP figure revised down further BBC News (25/2/11)

Questions

  1. Why has higher VAT and cotton prices impacted retailers such as Primark?
  2. Why was Primark less affected by declining sales in the run up to Christmas?
  3. What do we mean by purchasing power?
  4. Why is it hard to draw any conclusions about the performance of the UK at the moment?
  5. What does a slowing down of retail sales mean for the UK’s recovery? Will it influence the Chancellor’s Budget?
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A crude time for oil

Oil is a commodity like any other – its price is affected by demand and supply. Back in 2003, with the impending war in Ira and strikes in Venezuela, oil prices increased and continued to do so as further supply concerns developed in Saudi Arabia, Russia and Nigeria. This upward trend continued until 2008, when with the growing banking turmoil and demand for oil falling, the price began to decline. However, the crisis in Libya is only making matters worse. Its credit-rating has been downgraded with the potential for it to be lowered further and concerns are deepening about the country’s crude exports. As Libya is the world’s 12th largest exporter of oil, these supply concerns have started to push up oil prices once more.

With inflation rates already high and political turmoil pushing oil prices up further, consumers and firms are feeling the squeeze. These changes have also been reflected on stock markets across the world. Analyst, Michael Hewson at CMC Markets said:

‘Given the fact that we have seen massive gains in stock markets over the last few months, investors have been nervous about a possible correction for some time… The tensions in the Middle East with Libya imploding and concerns that the unrest could spread to Saudi Arabia could provide a catalyst for (this) correction.’

The disruption in the Middle East has caused companies such as Eni of Italy and Repsol YPF of Spain to shut down production, leading to output losses of some 22% of Libya’s production. As supply contracts from this region, prices will inevitably rise. However, the Saudi oil Minister has said that he is ready to boost production to offset any decline, but that at present there is no oil crisis. So, what can we expect to happen to oil prices in the coming months? It will all depend on changes in demand and supply.

Articles
Libyan crisis threatens to spark oil crisis Financial Times, Javier Blas and David Blair (22/2/11)
Libya protests: oil prices rise as unrest continues BBC News (22/2/11)
Oil producers, users sign charter as prices spike Associated Press (21/2/11)
Oil shock fears as Libya erupts Telegraph, Ambrose Evans-Pritchard (22/2/11)
Arab protests pose energy threat BBC News, Damian Kahya (22/2/11)
All eyes on Bahrain as Gulf tremors frighten oil markets Telegraph, Ambrose Evans-Pritchard (22/2/11)
Saudi Arabia seeks to calm market with words not oil Reuters (22/2/11)
Saudi Arabia says oil market needs no intervention Associated Press (21/2/11)
Peace in Bahrain is key to stopping oil prices from surging Live Oil Prices (22/2/11)

Data
Commodity Prices Index Mundi
Crude Oil Price Chart WTI

Questions

  1. What are the key factors that influence the supply of oil? How will each factor affect the supply curve?
  2. What are the key factors that influence the demand for oil? How will each factor affect the demand curve?
  3. Putting your answers to questions 1 and 2 together and using your knowledge of recent events in the oil market, explain the changes in oil prices.
  4. How are oil prices affected by OPEC?
  5. How have rising oil prices affected the stock market? What’s the explanation for this relationship?
  6. How might higher prices affect the economic recovery? Think about the impact on consumers and firms.
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Unexpected inflation rise

It is the Bank of England’s responsibility to ensure that inflation remains on target. They use interest rates and the money supply to keep inflation within a 1% band of the inflation target set by the government = 2%. However, for the past 12 months, we have had an inflation rate above the 3% maximum and this looks set to continue. Official figures show that the CPI inflation rate has risen to 3.3% in November, up from 3.2% in October 2010 – above the inflation target. There was also movement on the RPI from 4.5% to 4.7% during the same months. The ONS suggests that this increase is largely down to record increases in food, clothing and furniture prices: not the best news as Christmas approaches. It is not just consumers that are facing rising prices, as factories are also experiencing increasing costs of production, especially with the rising cost of crude oil (see A crude story). Interest rates have not changed, as policymakers believe prices will be ‘reined in’ before too long.

However, the government expects inflation to remain above target over the next year, especially with the approaching increase in VAT from 17.5% to 20%. As this tax is increased, retail prices will also rise and hence inflation is likely to remain high. There is also concern that retailers will use the increase in VAT to push through further price rises. A report by KPMG suggests that 60% of retailers intend not only to increase prices to cover the rise in VAT, but to increase prices over and above the VAT rise.

Despite the planned VAT rise spelling bad news for inflation, it could be the spending cuts that offset this. As next year brings a year of austerity through a decrease in public spending, this could deflate the economy and hence bring inflation back within target. However, there are suggestions that more quantitative easing may be on the cards in order to stimulate growth, if it appears to be slowing next year. The Bank of England’s Deputy Governor, Charles Bean said:

“It is certainly possible that we may well want to undertake a second round of quantitative easing if there is a clear sign that UK output growth and with it inflation prospects are slowing,” Bean told a business audience in London.”

The following articles consider the rising costs experienced by firms, the factors behind the inflation and some of the likely effects we may see over the coming months.

Articles
UK inflation rises to a surprise six-month high The Telegraph, Emma Rowley (14/12/10)
UK inflation rate rises to 3.3% in November BBC News (14/12/10)
Inflation unexpectedly hits 6-month high in November Reuters, David Milliken and Christina Fincher (14/12/10)
Food and clothing push up inflation Associated Press (14/12/10)
Retailers ‘to increase prices by more than VAT rise’ BBC News (14/12/10)
VAT increase ‘will hide price rises’ Guardian, Phillip Inman (14/12/10)
Slower growth may warrant more QE Reuters, Peter Griffiths and David Milliken (13/12/10)
Factories feel squeeze of inflation The Telegraph, Emma Rowley (13/12/10)
Figures show rise in input prices The Press Association (13/12/10)
November producer input prices up more than expected Reuters (13/12/10)

Data
Inflation ONS
Inflation Report Bank of England

Questions

  1. What is the difference between the RPI and CPI? How are each calculated?
  2. Why are interest rates the main tool for keeping inflation on target at 2%? How do they work?
  3. Is the inflation we are experiencing due to demand-pull or cost-push factors? Illustrate this on diagram. How are expectations relevant here?
  4. Explain why the rise in VAT next year may make inflation worse – use a diagram to help your explanation.
  5. Explain the process by which rising prices of crude oil affect manufacturers, retailers and hence the retail prices we see in shops.
  6. How are the inflation rate, the interest rate and the exchange rate linked? What could explain the pound jumping by ‘as much as 0.2pc against the dollar after the report’ was released?
  7. Explain why the public spending cuts next year may reduce inflation. Why might more quantitative easing be needed and how could this affect inflation in the coming months?
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Golf balls to help oil leak in Gulf of Mexico

On April 20 2010, there was an explosion on one of BP’s drilling rigs approximately 50 km offshore and over 1000 metres underwater in the Gulf of Mexico. This has led to more than 5000 barrels of oil leaking into the sea every day. The slick now covers an area the size of Luxembourg. Attempts have, at this time, failed to stop the leaks and the massive sheet of oil is edging closer and closer to the coast.

A giant dome was the original idea to stop the oil leak, however, this proved ineffective, due to a buildup of crystallised gas in the dome. The next step is to shoot debris underwater, including golf balls, tyres and human hair, under intensely high pressure and try to clog the leak. However, every time a new idea to stop the leak is tested, costs for BP mount. Furthermore, every time an idea fails, costs for the environment and the affected industries increase. Costs to BP are currently estimated to be $350 million, but other businesses are also suffering. Oil has now started to appear at costal resorts, yet even before it did, the tourism industry was suffering. Captain Louis Skmetta from Ship Islands Excursions said:

“Yesterday was beautiful. School are letting out, and we were hoping for about 500 passengers yesterday. We had a total of 166. So we are definitely seeing a little bit of an impact”.

Another industry that is concerned about the effects is the restaurant trade, in particular those who specialise in sea-foods. With the oil killing off marine life, prices of seafood for businesses and customers have already begun to rise in New York and London. The impact on this industry cannot be accurately estimated at present, but costs are continuing to rise every day this environmental crisis continues. These price rises are on top of already rising commodity prices: Wholesale food prices rose 7 percent in the 12-month period that ended March 31 2010. There is great uncertainty about the overall economic impact of this crisis, but what is certain is that every day oil continues to leak, costs will continue to rise.

Dome fails to stop Louisiana oil leak Independent (10/5/10)
Aerial view of oil leak in Gulf of Mexico BBC News (9/5/10)
BP plans to use debris to staunch Louisiana oil leak Financial Times (10/5/10)
Cost of oil leak spills into valley Dayton Daily News, Mark Fisher and Steve Bennish (9/5/10)
BP: oil leak will be stopped but can’t say when Associated Press (7/5/10)
BP shares down; Says Deepwater cost $350m so far Wall Street Journal (10/5/10)
BP misses out on FTSE rally as oil spill costs reach $350m so far Guardian, Nick Fletcher (10/5/10)
Conn. restaurants fear spike in costs of crabs, shrimps, oysters following Gulf oil-spill The Middletown Press, Cara Baruzzi (10/5/10)
BP examining oil leak options ABC News (10/5/10)
Oil-soaked crab threatens sea-food prices at top-ranked eateries Bloomberg BusinessWeek (10/5/10)
Tourism operators say oil threat hurting their pocketbooks WLOX, Danielle Thomas (10/5/10)
Coastal businesses feel the pain of Gulf oil leak NPR, Debbie Elliott (7/5/10)

Questions

  1. Try to carry out a cost-benefit analysis of the two attempts to stop the oil leak.
  2. Which industries are likely to be affected by the oil rig explosion? Explain your answers.
  3. Who should have to pay for the clean-up? Could the oil spill be seen as a negative externality?
  4. Why are restaurants in London seeing rising food prices, when the oil leak is located in the Gulf of Mexico?
  5. What has happened to BP share prices? How do you think they will change when the oil leak is stopped?
  6. What will be the impact on BP in the long term? Think about the role of corporate social responsibility.
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