Investment Institute
Viewpoint CIO

High inflation and flat screens

  • 02 December 2022 (3 min read)

Inflation is not homogenous. Not everything we buy is going up in price. But the things we need are. Food and energy price inflation is still high and that feeds into pricing dynamics in the rest of the economy. Televisions might be a lot cheaper than they were during previous World Cup tournaments, but the last year has seen prices of essentials rise dramatically. The beer and pizza that accompany football are certainly a lot more expensive! Shortages and transitions are responsible for inflation. But long term, we will pay more for things that are produced in an unsustainable way. Even more reason to invest in the businesses and technologies that will deliver cheaper, safer, cleaner energy and food in the long term.

On the box

If you are anything like me, you will have been watching a lot of television recently. I have been an avid armchair spectator of World Cup tournaments for as long as I can remember (Mexico 1970 probably being the first I really recall as a child - that Gordon Banks save!). Of course, the televisual experience was not the same in the 1970s. Today we have huge flat screens with high definition, surround sound and integrated internet connectivity. A far cry from my parents’ Radio Rentals set which seemed to need about five minutes to warm up. Technology really has come a long way. In my childhood, families tended to have one television set. Now there are screens in every room, and you can watch content on your phone wherever you are. Given the richness and variety of entertainment, education and information that comes through satellite and cable today, the television set is one piece of kit that has exponentially improved quality of life for billions around the world.

Cheap stuff

And it is cheap. According to the US Bureau of Labor Statistics, the cost of a television, adjusted for quality improvements, is only about 1% of its cost at the time of the 1982 World Cup in Spain. The same source tells us that, as recorded in the Consumer Price Index, the price of televisions has fallen by 16.5% compared to a year ago. That hardly fits the inflation narrative. I looked at what has been happening to prices of other things that people spend on – outside of essentials. Interestingly, some inflation rates have been falling. For the home, price increases for things like furniture, laundry equipment and television services have been declining. For recreation, the inflation rates for sporting goods, toys, and club subscription fees are down compared to six months ago. In the world of technology and communications, inflation momentum is also slowing. Wireless telephone services inflation is negative over the last year, as is the inflation rate applied to personal computers and peripheral equipment.  

But the snacks have become more expensive

Note that this is all based on a reading of the US consumer price data. I am not saying that same trends are observed elsewhere but if US inflation is easing that is very good news for the rate outlook and for investor and consumer sentiment. But the real inflation has been more in essentials – energy and food. Here things still need to improve. In October, food inflation was still 12% while household energy bills were 17% higher and gasoline prices still 14% higher than a year earlier. Housing is also a source of current inflation with rent costs tied to higher interest rates. The good news is that some of these inflation rates do appear to have peaked and have been easing in recent months.

I am cherry picking here and it needs to be acknowledged that in aggregate, weighted by how much of average household spending goes on the whole range of goods and services, core inflation in the US was still running at 6.3% in October (6.5% in the UK and 5% in Europe). This is still too high for central banks and more evidence is needed that inflation is easing across more and more goods and services. The consensus forecast for the November core CPI release is for a further decline to around 6%. It will be slow going and that is why I think rates will stay high in 2023 and there will be limited scope for central banks to signal easing for some time. Demand for essentials is much less elastic than for durable household goods and nice to have services so the stickiness of inflation in food, energy and rent is a negative for consumers. It needs to come down before we can get more optimistic on the overall outlook.

Energy up, food up

As I have stated before, energy remains key. Higher energy prices have fed directly into inflation but also to higher food prices. You need energy to run farms, produce feed and fertilisers, process the food commodities, distribute it, and sell it in stores. Agriculture is directly responsible for close to 20% of global carbon dioxide emissions and much more when we factor in energy used in the food processing and delivery chain. It is a sector that desperately needs to diversify its energy use for both economic and climate change reasons. It is also a source of biodiversity risk with some farming methods contributing to deforestation, soil erosion and deteriorating water resources. These are well recognised but have not received the same coverage as the climate crisis.

Food transition

If we were able to cost these effects in a similar way to how we can cost direct carbon use, I suspect that food prices would be subject to even greater upside. Charging food companies for biodiversity loss, pollution and adverse health effects would generate huge costs for food producers which would, in part, be passed on to consumers. The sector needs cheaper and cleaner energy but also needs the investment in technologies and farming methods that reduce intensive pressure on fragile ecosystems and communities i.e., to reduce the external cost. It’s clear what needs to be done in the energy transition and, despite the infuriatingly slow pace of political support for change, the momentum of the energy transition in the corporate and investment sectors is strong. I don’t get the same sense about food even though there are great things happening, at the margin, in terms of sustainable land use, plant-based proteins, laboratory-based cultivation techniques and so on. It’s more obvious in energy to understand the value chain from an oil rig in the Middle East to the gas you put in your car. It’s less easy to understand the impact of the supply chain from clearing parts of the Amazon for livestock grazing to the burger you eat at the World Cup barbeque party. And of course, climate change and food security are inextricably linked.

Television is great but it can’t sustain life like energy and food. These are the real sources of current inflation and as we gradually evolve the global economic system to internalise the cost to the health of the planet and its people from unsustainable practices, they will continue to be a potential source of inflation. Governments need to more openly recognise this and intensify efforts to encourage more investment in sustainable and, ultimately, cheaper energy and food production technologies. You can’t have sustainable economic growth without a sustainable planet and healthy, well fed, people.

On to the knockouts

Forgetting the politics, it’s been an enjoyable World Cup so far. Brazil and France are living up to being the two leading favourites and England have been impressive overall. I am looking forward to the knock-out stages and it will be interesting to see how the African teams perform, after some strong performances in the groups. Those TVs are going to keep working hard.

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