For the past three years, FFI – The Coffee People has won Gold in The Grocer’s Own Label Supplier Survey of retailers and wholesalers. We have achieved this partly by ensuring we constantly improve efficiency, keep costs down and maintain low prices.
As part of a pan-European group whose principal business is coffee, we are heavily exposed to variations in currency and commodity prices. From our perspective, the recent falls in sterling against the euro and the dollar were both dramatic and immediate. When costs start rising considerably we simply have no time to absorb the impact.
Last winter, costs rose 16% in a matter of weeks for all goods manufactured in euros and imported into the UK, while the recent rise of the dollar is already beginning to add 8% to the cost of raw materials in both Europe and the UK. Manufacturers who can will try and move production across borders to help mitigate some of these changes, but this state of flux in currency means rises in manufacturing costs of this size have to be recovered. Hence we see one of the major causes of rising inflation.
Some economists feel cost inflation has now peaked. I cannot agree. Manufacturing costs are still increasing and, as the dollar continues to strengthen, the price of all traded commodities rises further. This includes oil in particular and energy costs in general. While the astonishing recent highs in the oil price have receded, the impact of the new reality of oil and associated energy prices is still to be fully felt in the cost and retail price of finished goods. This in turn, guarantees a continuing rise in inflation that will feed through into increased wage demands and so the circle is complete.
The Bank of England’s Monetary Policy Committee has the responsibility “to maintain price stability”. In January, governor Mervyn King confirmed it was determined to keep inflation “on track to meet the 2% target in the medium term”. He has also stated that the recent fall in sterling was to be welcomed as “supporting overall economic activity”.
However, we are now experiencing both inflation well above 2% and stagnant growth. Ian McCafferty, CBI chief economic adviser, confirmed recently: “Manufacturers are becoming more downbeat about forthcoming levels of activity but are still having to raise their prices due to the severity of cost increases.”
If exporters were capitalising on the situation, perhaps there would be reason for optimism, but as Bob Hale of Grant Thornton said: “UK manufacturing has looked to its export markets for buoyancy this year, but it seems many of the key markets we export to, particularly in Europe, are now coming down with the same malaise afflicting the US and the UK.”
The past decade has seen much debate about the strength of sterling restricting the ability of exporters to capitalise globally, but we should not forget the benefit derived helped feed the record growth seen in the UK as we developed and maintained a low-inflation economy.
Commodity pressures have been amplified by the dramatic fall in sterling due to lower interest rates and we must surely ask the question: is this the right policy now?
Austin Sugarman is FFI sales & marketing director.