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Clouds on the horizon

Nia Williams

July 27, 2012

Tony Ward is chief executive of Home Funding

 

Following the disappointment of UK GDP figures released this week registering a 0.7% drop, I was heartened to think that third quarter GDP will see an improvement.

 

The bounce back in the third quarter will relate in part to the positive impact of the Olympics and the likelihood of an increase in private sector pay deals which will outstrip RPI inflation for the first time since 2009.

 

So with more money in our pocket, that’s great news as the assumption is that we will spend more and drive the economy back into positive territory.

 

However trawling through economic news today I was disheartened by news from the US department for agriculture that has warned that food prices are likely to rise in the US next year due to a drought gripping large parts of the Midwest.

 

It reported that this is the worst seen since 1956 and prices are expected to rise by between 3% and 4% in 2013.

 

Corn and soybean price have already soared recently as fields dried out and crops withered. 

 

Richard Volpe of the US department for agriculture told Reuters that “the drought is really going to hit food prices next year” adding that the pressure on food prices would begin to build later this year.

 

So why should we be concerned? Well the US is the world’s largest exporter of corn, soybeans and wheat and a rise in prices will impact economies worldwide.

 

In June UK food inflation fell to 3.5% from 4.3% – its lowest level in almost two years.

 

However if the drought in the US doesn’t end prices could once again rise.

 

Colin O’Shea, head of commodities at Hermes Fund Managers, said: “If we do not get rain in the near term then corn prices and related crops will continue at these elevated price levels. As a result the Governor of the Bank of England many not get the falling inflation numbers that he so desires.”

 

The last thing we need is for inflation to become a problem once again. Let’s pray for rain! In the US at least.

 


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