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inflation, shrinkflation and smaller sweets

26 Jul 2017

Justin Urquhart Stewart, Co-founder and Head of Corporate Development

The Office for National Statistics (ONS) released their latest inflation number and the headline number as measured by the consumer price index has actually gone down for a change, although it’s still high.

In May, inflation stood at 2.9% and in June it was measured as 2.6%. 

Digging into the detail – something I’ve become quite good at since to my sabbatical in Israel scratching around for remains left by the Roman Ferrata VI Legion – the fall is mostly down to a drop in the prices we pay at the petrol pump, as well as goods and services classified as recreational and cultural. This covers a variety of goods such as artistic services, hobbies and toys among other things.

Working against a further fall was an increase in the cost of furniture and household goods, as well as a rise in the cost of food and drink – both that bought from shops and consumed in restaurants and hotels.

But I was expecting it to be (much) higher given that we import about 50% of our food and since the value of Sterling is still way south of its level post the Leave.EU vote. So is this where shrinkflation is supposed to be stepping in?

A second set of statistics from the ONS released on 24 July suggests otherwise. They state that their price collectors make note of any changes in a product that’s been included in the index and alter the price to reflect any change in weight. So when a product’s been reduced in size to be able to offer it at the same price on the shelves, the statisticians calculate what the price would be for the original amount and include that in the sums. Who knew?

And it transpires that the only area where shrinkflation is apparently taking place across the category is in the sugar, jam, syrups, chocolate and confectionery index. Toblerone triangles, it transpires, were not the only sweeties getting smaller!

The data also shows that shrinkflation is nothing new. In fact, there’s been a lot of shrinkflation in place for the last five years, and as many as 2,529 products have been put through the practice.

number of product price quotes
But I’m confused… my weekly food shop is definitely more expensive and by more than the equivalent of the 0.02 percentage points of the index. In November 2016, my 250g jar of tartare sauce was £1.19 at a big supermarket. Last month, I paid £1.20 for a 144g jar from the same shop.

Using the same calculations as the ONS use, my 250g jar would cost £1.74 – a 46% hike. And I’m sure there are plenty of other examples. But why aren’t they showing up?

Well… not everything you and I buy will be among the 713 items used in the inflation purposes. My basket of goods is different from yours and not everyone’s shopping is considered when they calculate that ‘average’ UK basket. So, the top 4% of households aren’t consulted when drawing up the ONS’s shopping list and while the 150 locations visited out of the estimated 48,000 to collect prices may be indicative, they might not include what you pay for stuff in your home town or village. The only thing you can actually count on is that your inflation level is unique.

But what's this got to do with the price of fish?

Well, more data shows that our wages are not rising as quickly as headline inflation. We know from recent news headlines that the Government's imposed a 1% limit on pay rises for all state employees. And the rest of us aren’t doing much better. Again, it’s an average, but wages excluding bonuses were only going up in Q1 by 2.1% versus the 2.3% inflation over that same period. When other factors are taken into account, household income dropped by 2% in Q1 2017 versus Q1 2016.

So we are getting poorer in the pocket. And our savings will also be losing money in real terms if they’re just sitting in a bank account given that interest rates are still at 200-year lows. You might be getting absolutely nothing if you have your money in a current account. Welcome to real negative interest rates!

But at least there is something you can do about this. And that’s to ensure that your money is invested. A good multi asset fund could deliver a rate of return that beats the level of inflation and may, depending on the level of risk you take, also serve to compensate you for the drop in household income. Of course, there are no guarantees and your investments could fall as well as rise to the extent that you actually lose some of your original investment. But you would be doing something proactive – and over the long term creating real value not losing it!

Far better in my opinion to be proactive than procrastinate. As Benjamin Franklin once said: “You may delay, but time will not”.

Justin Urquhart Stewart
Co-founder and Head of Corporate Development

Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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