The price of rice has touched a new high, setting off fresh alarm around the world where export cuts by rice-producing nations have already led to food riots in countries that depend on imports to keep their populations fed.
While rice's surge – to $24.55 per 100lb for delivery in July – is unlikely to lead to marching in the streets in the UK, it is the latest in a series of commodities, from foodstuffs to oil and building materials, to post record prices in a boom threatening to inflict serious pain on the UK economy.
Oil was last night trading just off of the all-time high of $119.90 per barrel that it reached earlier this week, while copper remained a whisker under the new record it reached earlier this month. By their very nature, commodities, dependent on everything from weather and the quality of harvests to investments made years or decades ago based on a best guess of what demand would be today, are volatile.
What is different about this boom is that as the US slides toward recession, prices have continued to rise. In six decades or so of US economic hegemony, this has never happened.
Kevin Norrish, a commodities analyst at Barclays Capital, said this was due primarily to a "structural shift in demand". The health of the US used to have a direct, causal relationship to the prices of nearly all commodities. This is no longer the case. The demands from China and India have supplanted America's role as global price arbiter.
For the UK, struggling to stave off a major slowdown, this bodes ill. Inflation is running at 2.5 per cent at the moment, above the Government's 2 per cent target. That leaves the Bank of England in a difficult position; it could cut interest rates to boost the economy, but doing so risks cranking up inflation further.
"The inflation issue is going to be very troubling for central banks across the UK and Europe. It is a major issue," said Stuart Green, an economist at HSBC. It is even worse in Europe, where the European Central Bank has set an inflation target of less than 2 per cent – it is currently at 3.5 per cent.
Coming out of an unprecedented era of corporate profitability, companies have been able to absorb some of their rising costs without passing them on through higher prices. Economists warn that their ability to do may have run its course. "A lot of these costs are to an extent absorbed by margins of these companies, but that can only last so long – they will have to be passed on to consumers eventually," said Mr Green. This has already begun. Associated British Foods warned earlier this week that bread prices, already up by 15 per cent, were set for further rises. Household energy bills have leapt by a similar amount.
What is happening, said Mr Green, is essentially a "forced redistribution" of spending. He said: "You can't not eat, and you can't not have energy for your house." The upshot will be starvation of other sectors of the economy, making a sharp slowdown virtually inevitable. How sharp depends, in can be said quite literally, on the price of rice in China.
The knock-on effect on British industry
British Airways introduced its first fuel surcharge in May 2004, adding £2 per ticket to account for the rising price of oil. In February, it passed on its 12th, bringing to £128 the amount long-haul passengers are made to pay for pricey fuel. The airline warned last month that at $120 per barrel of oil it would lose all profitability. With the price nearly there, more surcharges are surely in the offing. Ryanair put itself in the difficult position by declaring it would never introduce a fuel surcharge. It has not. Instead, like its rival easyJet, it has come up with a whole arsenal of new fees that while not technically "fuel surcharges", achieve the same objective. Simply checking in at the airport, rather than doing so online, costs £6. Checking a bag? That will be £12.
Those who thought that the flurry of gas and electricity price rises pushed through earlier this year were the last are quite probably in for a rude surprise. Five of the UK's top six energy suppliers hiked their gas and electricity prices by about 15 per cent in January and February. Scottish & Southern was the last to do so on 1 April. Since January wholesale gas prices have risen by just over 50 per cent, while wholesale electricity prices have jumped by nearly a third. Average household gas and electricity bills have breached £1,000.
Food prices in the shops are up 4 per cent in the past 12 months, according to the British Retail Consortium (BRC). But that is nothing compared with what is happening at the farm gate. Year-on-year, wholesale milk prices have gone up by 44 per cent compared with 17 per cent in the average price to consumers. And wheat milling has gone up from £99 to £200 per tonne, while a loaf costs only about 15 per cent more. "Margins are incredibly small so we can't dig in much deeper without taking a hit," said a source at one major supermarket.
The non-food sector has different problems. Rising commodity costs do have an effect, with higher petrol prices inflating distribution costs and retailers are feeling it. "What's killing me is the underlying costs," said Sir Philip Green, the owner of the Arcadia group. But the biggest issue is demand, as consumers have less spare money for discretionary spending.
The British Beer and Pub Association (BBPA) is predicting the cost of a pint – currently averaging £2.80 – will hit £4 by the end of the year. "The brewers are trying to leak price rises into the market in a controlled way rather than have one heavy hit," said Mark Hastings, from the BBPA. For most restaurants, the biggest problem is meat. So far prices are stable, but steak may be about to be replaced with stew.Rice is also a huge issue.Reuse content